Understanding the Basics of a Chapter 7 Bankruptcy

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Bankruptcy law can be very complicated at times for a layman not familiar with legal jargon and terms. I have been writing a series about the basics in bankruptcy and this article deals with understanding the basics of a chapter 7 bankruptcy.

Definition of a Chapter 7 Bankruptcy

A chapter 7, often called the liquidation bankruptcy, is a type of bankruptcy found in Title 11 of the Bankruptcy Code. It is a form of liquidation where a bankruptcy trustee takes what non-exempt, unencumbered assets an owner has and sells the assets in order to pay off claimed, unsecured debt in a prioritized process.

How Debts are Treated in a Chapter 7 Bankruptcy

Debts in a chapter 7 bankruptcy can be treated differently, depending on the on what type of debt is owed by the filing debtor. Both debtor and creditor have certain rights during the bankruptcy process in regards to payment of the debts.

Payments for unsecured debts are subject to the right of the filing debtor to own certain assets as exempt property and are also subject to the rights of secured creditors. A creditor holding an unsecured claim will get a distribution of the available funds if the case is an asset case and the creditor files a proof of claim with the bankruptcy court.

All non-exempt debts not paid in full during the payment process will be discharged at the end of the bankruptcy process. If a filing debtor does not have any qualifying assets to liquidate, the case is considered to be a no-asset case, and all the qualifying non-exempt debts will be discharged from the responsibility of the debtor. Most chapter 7 bankruptcies filed are no-asset cases.

Qualifying to File Under a Chapter 7 Bankruptcy

Before any debtor files for bankruptcy under a chapter 7, they must qualify for relief under the Bankruptcy Code.

In order to qualify to file a chapter 7 bankruptcy, an individual or entity filing cannot have filed a chapter 7 bankruptcy within the past eight years or a chapter 13 within the last six years; cannot have had a bankruptcy dismissed in the past 180 days for violation of a court order, been found to have committed fraud or abuse of the bankruptcy system, or requested a dismissal after a creditor asked for relief from the automatic stay; cannot have been found to have defrauded creditors; and the filer or entity filing must have a combined income at or below the median income in the state in which they live, or they must be able to pass the means test if their income is above the median income for their state.

To file a chapter 7 bankruptcy, a filing debtor may be an individual, a partnership, a corporation or other business entity. Since the primary purpose for filing a chapter 7 bankruptcy is to obtain a fresh start by having certain unsecured debts discharged in the process, the filing debtor has no liability in the future for any discharged debts. In a chapter 7 case, a discharge is only available to individual debtors, not to partnerships, corporations, or business
entities.

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