Chapter 7 bankruptcy, often called "liquidation" bankruptcy, is a legal process under the U.S. Bankruptcy Code that allows individuals or businesses to eliminate many types of unsecured debts by selling (liquidating) the debtor's nonexempt assets to repay creditors
How Chapter 7 Bankruptcy Works
- The debtor files a petition with the bankruptcy court along with detailed financial documents, including schedules of assets, liabilities, income, expenditures, and tax returns
- The court issues an automatic stay that temporarily stops most debt collection actions like foreclosure, wage garnishment, and eviction
- A court-appointed trustee takes control of the debtor's nonexempt property, sells it, and distributes the proceeds to creditors according to a priority system
- The debtor is allowed to keep exempt property, which varies by state and federal exemptions, so not all assets are sold
- After liquidation and distribution, the court discharges the remaining eligible debts, meaning the debtor is no longer legally required to pay them
Key Points
- Chapter 7 is the most common form of bankruptcy in the U.S. and is often used by individuals who cannot repay their debts and have few assets
- It is a relatively quick process compared to other bankruptcy types like Chapter 11 or Chapter 13, which involve reorganization or repayment plans
- Certain debts, such as child support, alimony, some taxes, court fees, and most student loans, are generally not dischargeable under Chapter 7
- For businesses, Chapter 7 usually means ceasing operations, with a trustee liquidating assets to pay creditors; corporations do not receive a discharge of debts, but individuals may
In summary, Chapter 7 bankruptcy provides a legal way to wipe out many debts through liquidation of nonexempt assets, offering a fresh financial start for debtors who qualify
