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What Is A Chapter 7 Bankruptcy?

by | Oct 25, 2017 | Bankruptcy

A Chapter 7 bankruptcy case is also referred to as a “liquidation” bankruptcy. However, don’t let this frighten you away from obtaining more information about how filing Chapter 7 can help you resolve your debt problem. For many individuals, filing bankruptcy under Chapter 7 gives them the fresh start they need to overcome a financial crisis.

Why Do People File Chapter 7 Bankruptcy?

Chapter 7 is available to individuals and businesses seeking relief from debt. While some people may need to file bankruptcy because they abused credit, most individuals file bankruptcy because they experienced a financial crisis. Examples of reasons why someone may file under Chapter include:

  • Death of a spouse
  • Medical emergency or illness (i.e. cancer, car accident, etc.)
  • Loss of a job or decrease in income
  • Divorce
  • Failed business
  • Credit card debt
  • Judgments or collection lawsuits

Regardless of why you need to file bankruptcy, you will be treated the same under the law. Even if you made a few poor financial decisions and got into debt over your head, you will not be judged, and you will have the same rights as a person who files Chapter 7 because she had a heart attack and cannot pay the medical expenses.

In fact, the United States Supreme Court explained the reason for bankruptcy over 80 years ago. The justices made it very clear that bankruptcy was not intended to be a punishment or a terrible thing. Congress intended bankruptcy to be a way to help those who cannot afford to pay their debts for any reason.

In the case of Local Loan Co. vs. Hunt (1934), the Supreme Court explained the purpose of bankruptcy:

“[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”

The purpose of filing bankruptcy is simple — get rid of your debt so that you can recover from your financial crisis and begin rebuilding your finances for a stronger future. In other words, you can have a “fresh start.”

Why Is Chapter 7 Bankruptcy Referred to As a Liquidation?

Under Chapter 7 of the bankruptcy code, debtors must surrender non-exempt assets to a bankruptcy trustee.  The trustee liquidates the non-exempt assets and uses the funds to pay the debtor’s unsecured creditors. However, most Chapter 7 bankruptcy cases are ruled no=asset cases because the debtor’s assets are exempt.

The Federal Bankruptcy Code provides certain exemptions that protect some property from the trustee and creditors. Depending on the state you live in, you may be required to use exemptions your state has enacted, or you may be able to choose between federal or state exemptions.

Even if some assets are not covered by exemptions, the assets may not have any substantial equity to make it worthwhile for the trustee to take possession of the assets and sell the asset for the benefit of the unsecured creditors. Therefore, most debtors who file Chapter 7 bankruptcy get rid of most, if not all, of their unsecured debt while keeping all their property.

How Long Does a Chapter 7 Bankruptcy Case Take?

Most no-asset cases are completed four to six months after filing the bankruptcy petition. After you file your bankruptcy petition, a hearing will be scheduled. The Chapter 7 trustee presides over the Meeting of Creditors. The trustee asks questions regarding your income, expenses, debts, and assets. Most trustees have already reviewed your case, so this is just to put the information on record. Creditors may appear and ask questions; however, most creditors don’t bother to attend the hearing.

The trustee and creditors have 60 days from the date of your hearing to object to your discharge.  If no objection is filed before the deadline, the court issues your bankruptcy discharge, and your case is closed.  Creditors are barred from pursuing any action to collect a debt discharged in bankruptcy. If a creditor violates the bankruptcy discharge, the court can impose sanctions on the creditor.

How Do I Know If Chapter 7 Is Right for Me?

Bankruptcy law is complex. If you make a mistake, it could result in the loss of an assets or a denial of your bankruptcy discharge. The best step is to seek advice from a professional who is experienced in bankruptcy law. In addition to determining if you may lose assets by filing a Chapter 7, a bankruptcy professional can help you determine if you meet the income requirements for filing a Chapter 7 bankruptcy case.

For more information about Chapter 7 bankruptcy filings, you can view the information provided by the United States Courts. We also urge you to contact our office for additional information about bankruptcy.