What Is Chapter 7 Bankruptcy

Chapter 7 of the Bankruptcy Code presides over the process of liquidation under the bankruptcy laws of the United States. (Compared to this, Chapter 11 presides over the process reorganization of a bankruptcy). Chapter 7 is the most common type of bankruptcy in the United States. When an unsuccessful business is deeply in debt and not capable of servicing that debt or payback its creditors, it may file or be forced by its creditors to file for bankruptcy in a federal court under Chapter 7, which refers to liquidation. A Chapter 7 filing means that the business intends to sell all its assets, distribute the earnings to its creditors, and then close down operations. This may or may not mean that all workers will lose their jobs. When a very large company enters Chapter 7 bankruptcy, it may be that complete sectors of the company are sold as a whole to other companies during the liquidation.

Secured creditors, such as debenture holders and bondholders, have a higher-priority claim on the proceeds as compared to other unsecured creditors. These generally refer to vendors who have not yet been paid for products previously delivered to the company. A company or other legal entity that is a debtor under Chapter 7 is not entitled to a discharge of its debts once all assets of the company have been fully dispensed -- the case is closed and the debts of the entity, hypothetically, continue to exist.

Individuals need to file for bankruptcy in a federal court under Chapter 7. In a Chapter 7 bankruptcy, the individual is permitted to keep specific exempt property and most liens. The interim trustees sell other assets present. These proceedings are used to repay creditors. Often many types of unsecured debt are paid in part or written off. There are 19 (as of 2005) classes of debt not discharged in a Chapter 7. Common exceptions to discharge are child support, most taxes, student loans and fines imposed by a court for any crimes committed by the debtor.

Claiming Bankruptcy under Chapter 7 has its set of advantages and disadvantages. As such, a business or an individual should take into consideration a number of factors before claiming.