What is Chapter 7 bankruptcy and how does it work?
The liquidation bankruptcy allows individuals or businesses to eliminate most of their debts and start fresh financially at the cost of losing everything.
US law has six different types of bankruptcy, each catering to different circumstances and entities seeking relief from debt.
In Chapter 7 bankruptcy, a debtor’s non-exempt assets are liquidated, meaning they are sold by a court-appointed trustee. The proceeds from the sale are then used to repay creditors as fully as possible. This is what people may consider bankruptcy when they hear the word; nearly everything which isn’t nailed to the floor is sold to pay for debts.
For those not familiar with American classifications, Chapter 7 Bankruptcy is the one you don't come back from. There's no reorganization plan, everything the company owns is sold off to pay as much of their debt as possible and the company is no more. https://t.co/sK1qaprvE4
— Darryl Mott (@Abstruse) June 13, 2023
However, certain assets may be exempt from liquidation, such as a primary residence, a vehicle, and essential personal belongings, depending on the specific exemptions allowed by state or federal law.
Chapter 7 bankruptcy can provide individuals or businesses with a fresh start by wiping out overwhelming debt. However, it also has significant consequences, including the loss of non-exempt assets.
Filing for Chapter 7 bankruptcy
To file for Chapter 7 bankruptcy, the debtor must pass a means test, which compares their income to the median income in their state. The purpose of the means test is to determine if the debtor has enough disposable income to repay their debts partially or in full. If the debtor’s income is below the state median or they don’t have enough disposable income, they typically qualify for Chapter 7.
Once the bankruptcy petition is filed, an automatic stay goes into effect, stopping most collection actions by creditors. The court then appoints a trustee to oversee the case. The trustee’s role is to gather the debtor’s non-exempt assets, sell them, and distribute the proceeds to creditors.
Thinking about filling for bankruptcy? Or know of anyone who could use information about it?
— TheDebtDefenders (@thedebtdefender) June 13, 2023
Even if you are just looking to learn more about the subject, here are the main differences between the two main types of bankruptcy people fill for.#Bankruptcy #Chapter7Bankruptcy pic.twitter.com/3TV3Tp46jx
At the end of the bankruptcy process, the debtor receives a discharge, which is a court order that eliminates personal liability for most types of debts. Certain debts, such as student loans, child support, and some taxes, are typically not dischargeable.