Chapter 7, Title 11, United States Code
Chapter 7 of Title 11 U.S. Code is the bankruptcy code that governs the process of liquidation under the bankruptcy laws of the U.S. In contrast to bankruptcy under Chapter 11 and Chapter 13, which govern the process of reorganization of a debtor, Chapter 7 bankruptcy is the most common form of bankruptcy in the U.S.[1]
For businesses[edit]
When a financially troubled business is unable to pay creditors, the business may file (or be compelled by creditors to file) for bankruptcy in a federal court under Chapter 7, which means that the business ceases operations unless those operations are continued by the Chapter 7 trustee. In a Chapter 7 bankruptcy, the trustee is appointed almost immediately, with broad powers to examine the finances of the business in bankruptcy; generally, the trustee sells the assets and distributes the money to the creditors.[2]
The investors who took the least amount of risk prior to the bankruptcy are generally paid first. For example, secured creditors will have taken less risk, because the credit that they will have extended is usually backed by collateral, such as assets of the debtor company.[3] Fully secured creditors—that is, creditors,
such as collateralized bondholders and mortgage lenders, for whom the value of collateral equals or exceeds the amount of debt outstanding—have a legally enforceable right to the collateral securing their loans or to the equivalent value, a right that generally cannot be defeated by bankruptcy. They are therefore not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make.
In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge, whereas an individual may (see ). Once all assets of the corporate or partnership debtor have been fully administered, the case is closed. The debts of the corporation or partnership theoretically continue to exist until applicable statutory periods of limitations expire.
For individuals[edit]
Individuals who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 ("straight bankruptcy", or liquidation).[4] Chapter 7, as with other bankruptcy chapters, is not available to individuals who have had bankruptcy cases dismissed within the prior 180 days under specified circumstances.[4]
In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Most liens, however (such as real estate mortgages and security interests for car loans), survive. The value of property that can be claimed as exempt varies from state to state. Other assets, if any, are sold (liquidated) by the trustee to repay creditors. Many types of unsecured debt are legally discharged by the bankruptcy proceeding, but there are various types of debt that are not discharged in a Chapter 7.[2] Common exceptions to discharge include child support, income taxes less than three years old, property taxes, student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determine the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor. Spousal support is likewise not covered by a bankruptcy filing, nor are property settlements through divorce. Despite their potential non-dischargeability, all debts must be listed on bankruptcy schedules.
A Chapter 7 bankruptcy stays on an individual's credit report for ten years from the date of filing the Chapter 7 petition. This contrasts with a Chapter 13 bankruptcy, which stays on an individual's credit report for seven years from the date of filing the Chapter 13 petition. This may make credit less available or may make lending terms less favorable, although high debt can have the same effect. That must be balanced against the removal of actual debt from the filer's record by the bankruptcy, which tends to improve creditworthiness. Consumer credit and creditworthiness is a complex subject, however. Future ability to obtain credit is dependent on multiple factors and difficult to predict.
Another aspect to consider is whether the debtor can avoid a challenge by the United States Trustee to his or her Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to the debtor's Chapter 7 filing is whether the debtor can otherwise afford to repay some or all of his debts out of disposable income in the five year time frame provided by Chapter 13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.
Some bankruptcy practitioners assert that the U.S. Trustee has become more aggressive in recent times in pursuing (what the U.S. Trustee believes to be) abusive Chapter 7 filings. Through these activities the U.S. Trustee has achieved a regulatory system that Congress and most creditor-friendly commenters have consistently espoused, i.e., a formal means test for Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has clarified this area of concern by making changes to the U.S. Bankruptcy Code that include, along with many other reforms, language imposing a means test for Chapter 7 cases.
Creditworthiness and the likelihood of receiving a Chapter 7 discharge are some of the issues to be considered in determining whether to file bankruptcy. The effect of bankruptcy on creditworthiness in many cases might not be significant, because by the time many debtors are ready to file for bankruptcy, their credit score is already extremely low. Also, new credit extended post-petition is not covered by the discharge, so creditors may offer new credit to the newly-bankrupt.
Methods of filing[edit]
Official Federal bankruptcy forms are prescribed in the relevant Rules, and are a computer based equivalent option of paper forms. Software can also be used, which generates court-ready forms and is more simple for users. Bankruptcy petition preparers can aid in completing applications, as can a bankruptcy attorney.
Further reading[edit]
Ltd, Michigan Legal Publishing (15 December 2015). United States Bankruptcy Code; 2016 Edition. Michigan Legal Publishing Limited. ISBN 9781942842033.