Chapter 7 – Liquidation
Chapter 7 of the United States Bankruptcy Code is commonly known as the “fresh start,” “straight,” “liquidating,” or “personal” Bankruptcy. It is also referred to as consumer Bankruptcy, although businesses can also file under this chapter. This chapter allows an individual (with or without a spouse) to eliminate most or all of their debt while being allowed to keep most property. The fresh start is accomplished by liquidation of non-exempt assets and discharge of debts.
In many cases, the individual may keep their financed home or car, provided they continue to make timely payments to the lender and keep appropriate insurance coverage in place. In addition, the Debtor can choose to voluntarily repay any debt upon agreement with the creditor (called a “reaffirmation agreement”) in exchange for continued use of the creditor’s collateral. There are lots of options and potential outcomes in this area of the bankruptcy process – we can help ensure you feel comfortable throughout every step of the way!
Chapter 7 can eliminate most of the following types of debts:
- Credit Card debts;
- Judgments – Unless fraud or crime related;
- Deficiency debts on repossessed autos and foreclosures;
- Personal loans;
- Lawsuit debts;
- Personal Injury Debts – except driving while intoxicated and criminal injury; and
Medical debts, etc.
Chapter 7 is the most commonly filed form of bankruptcy and can allow for a new start. More and more people find themselves struggling with debt they cannot manage. Chapter 7 bankruptcy allows for their debts to be discharged and lets them gain control of their financial situation with a fresh start.
Chapter 7 does not eliminate student loans except in undue hardship cases, debts from certain types of taxes, alimony, maintenance, or support payments, fines, penalties and criminal restitution, debts incurred through fraudulent conduct, debts incurred through intentional injury to person or property, or debts from personal injuries caused by driving while intoxicated.
Pros and Cons of a Chapter 7 Bankruptcy
- The “automatic stay” of bankruptcy stops most creditors’ collection actions, including garnishments, tax levies, demands, lawsuits, repossessions, sales, or lease terminations.
- Eliminates (by discharge) liability on all unsecured dischargeable debt.
- Immediate (almost) fresh start.
- Future income (earned through the post-Bankruptcy services of the Debtor) is the Debtor’s. It does not go to pay the Bankruptcy creditors (other than on secured claims, if you choose to keep the property that secures the loan).
- No Repayment Plan to propose and follow through with.
- No debt limits are set.
- Usually less costly fees than a Chapter 13 Bankruptcy, and considerably less than a Chapter 11 Bankruptcy.
- A corporate Chapter 7 with assets will pay IRS or State Taxing Authority unpaid tax withholdings prior to non-tax claims, increasing the likelihood of reducing the amount of penalty claims that can be asserted against corporate officers.
NOTE: This is a general listing of benefits. Not all benefits will be available to all Debtors. Consult with your attorney for specific information.
- The Chapter 7 Trustee may sell assets (including leases or the Debtor’s business) having more than nominal value over and above any liens and exemptions.
- No discharge from recent income tax liability, or income tax liability where returns are not filed or filed recently, or fraud is involved in the return.
- If the appropriate action is filed by a creditor, a debt may be excepted from discharge if it arises by way of certain types of fraud or willful and malicious injury.
- The automatic stay may be lifted in favor of a secured party or landlord as to property or a leasehold if it is of no value or of nominal value over and above liens and exemptions.
- No discharge for a partnership, LLC, or corporation.