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What is Chapter 7 Bankruptcy

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Authored by Carly Hart in Legal
Published on 10-24-2009

What is Chapter 7 bankruptcy? Chapter 7 is the section of the Bankruptcy Code that governs how an individual or company liquidates its assets to pay debts. While Chapter 7 bankruptcy is typically thought of as a vehicle for individual debtors, companies wishing to liquidate their assets can file under Chapter 7 if they do not want to reorganize under Chapter 11. Chapter 7 bankruptcies are most often filed by consumers drowning in credit card or medical debt.

How does a Chapter 7 bankruptcy work? Normally, debtors seek legal advice to determine which chapter of the Bankruptcy Code would best remedy their situation or to determine whether there is another viable option to obtain relief from debt. An experienced bankruptcy attorney will sit down with the debtors and take a hard look at financial information such as debts, assets, income, and expenses to determine the best course of action going forward. If there is no recourse but a Chapter 7 bankruptcy petition, the attorney would then prepare and file their client’s petition for relief with the local Bankruptcy Court. While it is possible for a debtor to file his or her own bankruptcy petition, it is generally best to obtain legal counsel to ensure that the bankruptcy petition complete and filed correctly. In addition, the bankruptcy process can be difficult to navigate without professional help.

What a Chapter 7 bankruptcy does is allow for the liquidation/sale of any assets that are not exempt under the Bankruptcy Code. The proceeds, if any, are then used to pay creditors. There is a set amount allowed to be exempt from sale under each category. Though exemptions vary from state to state, debtors can expect to protect some of their personal property by using the various exemptions allowable in their state. As a general rule, debtors can exempt property such as household goods, automobile, tools of the trade, jewelry (such as wedding bands) and personal items such as clothing. There is even a wild card option that can be used to help cover an asset not already covered under a different exemption.

After a Chapter 7 bankruptcy petition is filed, the debtor receives a stay. A stay means that a debtor’s creditors must immediately cease and desist collection efforts, including dun letters and telephone calls. Debtors who do receive calls or letters from creditors should refer the creditors to their attorney.

Debtors who file for Chapter 7 bankruptcy protection can expect it to take several months for the process to play out. After a Chapter 7 bankruptcy petition is filed, the debtor will be scheduled to attend a Meeting of the Creditors. This meeting is usually very short. If no objections are filed and there are no other unresolved issues, a debtor can expect to receive a discharge a few months after the Meeting of the Creditors. A Chapter 7 discharge does not absolve debtors of all debts. Some debts that are not quashed by a Chapter 7 bankruptcy include child support obligations and student loan debt. Before a discharge is issued, debtors may choose to reaffirm a debt. Debts that some debtors may wish to reaffirm include automobile loans or credit cards with small balances on them.

Chapter 7 bankruptcy can be a complex process to navigate without an attorney’s assistance. Those whose financial circumstances bring them to contemplate a Chapter 7 bankruptcy should consult an attorney who concentrates in bankruptcy to determine whether or not a Chapter 7 bankruptcy filing is the best solution for their financial situation.

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