What is Chapter 7 Bankruptcy?

February 18, 2011

The Bankruptcy Code is a set of federal laws first enacted by Congress in 1979. The Bankruptcy Code is divided into chapters that provide specific legal protection for debtors experiencing serious financial difficulty. Chapter 7 of the Bankruptcy Code is the most commonly filed bankruptcy. Chapter 7 is often called a “liquidation” bankruptcy and is used by individuals, partnerships, or corporations who have no hope for repairing their financial situation and repaying their creditors. During a Chapter 7 case, the debtor’s property is liquidated in accordance with the rules of the Bankruptcy Code and the proceeds are used to pay creditors.

However, liquidating everything that a person owns is not practical. State and federal laws exempt certain property from creditor collection, and the truth is that only about one case in twenty-five has an asset that can be converted to cash and distributed to creditors, according to a report from the United States Trustee Program. Obviously, if you own a very expensive luxury item like a grand piano or expensive art, that property is at risk. On the other hand, if you own “Average Joe” type property necessary for day-to-day living, your property is likely protected from creditors.

The instant a Chapter 7 case is filed an “automatically stay" against creditor action is imposed. This stay arises by operation of law and requires no judicial action. Creditors may not initiate or continue lawsuits, garnish wages, or even place telephone calls demanding payment. This provides a “breathing spell” for the debtor to develop a strategy for eliminating or repaying debts. The bankruptcy clerk sends notices of the bankruptcy filing to all creditors listed in the debtor’s bankruptcy schedules.

One of the main objectives of Chapter 7 bankruptcy is to give an honest debtor a "fresh start." The bankruptcy court will issue a discharge to the Chapter 7 debtor near the end of the case  which acts as a legal injunction against the collection of debts. A discharge is only available to individual debtors, not to partnerships or corporations.

Chapter 7 is an “erase-your-debts-start-fresh” bankruptcy. Unlike Chapter 13 or Chapter 11, the debtor does not pay anything to creditors from future income. The vast majority of debtors lose nothing during the Chapter 7 process. However, there are income restrictions and some debtors may have equity issues in property. An assessment from an experienced bankruptcy attorney will inform you of your eligibility and whether Chapter 7 bankruptcy is right for you.

Fears & Nachawati Bankruptcy Law Office

4925 Greenville Ave Suite 715, Dallas, TX 75206 (214) 890-0711
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