What Is A Chapter 7 Bankruptcy? What Is A Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy, also called a liquidation bankruptcy, is a type of bankruptcy proceeding where the debtor presents the court with all non-exempt assets, permitting a bankruptcy trustee to sell those assets. In exchange, a debtor is permitted to discharge a large portion of the debtor’s debts. An individual or business entity may file a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is a federal court proceeding administered by bankruptcy courts set up in the United States. More than 1 million bankruptcy cases have been filed in 2010, with more than 2/3 of those cases being a Chapter 7 case.

Property under a Chapter 7

A debtor is permitted to retain a certain amount of property under a Chapter 7 bankruptcy, termed exempt property. Though a federal proceeding, the amount and type of exempt property is defined by state law. Federal exemptions do exist, and in some states, a debtor may elect between federal and state exemptions.

Common types of exempt property include: A limited amount of equity in a homestead, limited equity in a vehicle, retirement accounts protected by federal or state law, life insurance policies, Social Security benefits, wearing apparel, food, fuel and a limited amount of tools of the trade of the debtor.

If the property is used as security for a debt, even if exempt property, the debtor will normally be required to surrender the property, redeem the property by paying the debt, or agree to repay the debt to the creditor.

Chapter 7 Bankruptcy Process

When a debtor files a Chapter 7 bankruptcy, the debtor will file a petition and schedules, listing all creditors, each debt, the property of the debtor, the property the debtor claims is exempt, and a number of other items of financial information. If an individual consumer debtor, the debtor must also list monthly income and expenditures normally made.

Once filed, creditors will be notified by the bankruptcy court of the commencement of a proceeding. Once notified, nearly all collection activities must cease, except with permission of the bankruptcy court.

A trustee will be appointed by the court to be in charge of the property of the debtor. The trustee will review the information provided, may ask for additional information and may demand turnover of all non-exempt property. The trustee will ask creditors to file proof of their claims against the debtor. If there is non-exempt property available, the trustee will sell the property and distribute the proceeds to creditors. The priority of which creditor is paid first is set by the bankruptcy code.

Discharge of the Debtor

When the debtor obtains a discharge, the debt is legally forgiven, and the creditor is precluded from attempting to collect the debt. There are numerous debts not forgiven in a Chapter 7 bankruptcy. Some of these debts include domestic support obligations, student loans, recent taxes, some debts incurred through criminal activity, fines, etc. Debts such as car loans or mortgages are usually not forgiven unless the property is surrendered/
by Gary Jodat
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Disclaimer: The information provided is for informational and educational purposes only. It is not intended to be, nor should it be construed as legal advice. For legal advice, Chapter 7 Bankruptcy, visit Gary Jodat of JodatLawGroup.com.
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