Chapter 7 Bankruptcy Liquidation Basics

Individual people can file for bankruptcy. Businesses can file for bankruptcy. Different laws apply to individuals and businesses, and some businesses are not considered different from the people behind them, such as sole proprietorships. LLCs and corporations have separate identities than the individuals behind them.

Chapters of the Bankruptcy Code

Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15 of the bankruptcy code all provide an avenue for someone or some business to file a type of bankruptcy. Not all provisions or avenues are available to all people or entities. Each provision will have a different effect on the person or entity’s debt.

For example, Chapter 11 is a reorganization method and does not merely discharge all debt. Chapter 7 is a liquidation method discharging the debt of individuals, with some exception.

Liquidation Aspects of Chapter 7 Bankruptcies

In a Chapter 7 liquidation, the bankruptcy trustee is charged with gathering the property of the person or business filing for bankruptcy. The bankruptcy trustee sells this property in order to pay the creditors.

A bankruptcy trustee is not permitted to sell all property of the person or business filing bankruptcy, however. Some property will be exempt from liquidation, such as basic necessities. Nonexempt property will be gathered and sold by the bankruptcy trustee. Sometimes there are disputes over whether something is exempt or nonexempt. Sometimes people have only exempt property.

Individuals and Corporations under Chapter 7

Chapter 7 only allows certain people or entities to file for bankruptcy. The results will also depend on who it is that is filing the bankruptcy. An individual person will be treated differently than a corporation, for example.

One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The person has no liability for discharged debts. In a Chapter 7 case, however, a discharge is only available to individual people, not to partnerships or corporations.

Although an individual Chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.

Qualifying for Chapter 7 Relief

To qualify for relief under chapter 7 of the Bankruptcy Code, the person filing may be an individual, a partnership, or a corporation or other business entity. Relief may be available under chapter 7 irrespective of the amount of the person’s debts.

A person is not permitted to file a Chapter 7 bankruptcy if the person has had a bankruptcy petition dismissed in the past 180 days due to the person’s purposeful failure to appear before the court or comply with orders of the court, or if the person voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.

In addition, no person may be a debtor under chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. There are a couple of exceptions to this rule.

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