There are bankruptcy provisions for businesses, bankruptcy provisions for individuals, bankruptcy provisions for reorganization, and bankruptcy provisions for liquidation. Each individual or business must determine his, her, or its own needs and abilities when considering bankruptcy.
Chapters of the Bankruptcy Code
Chapter 7 bankruptcy is often referred to as the liquidation provision. There are alternatives to liquidation. A liquidation does not allow a business to reorganize, continue, and avoid liquidation. Chapter 11 is the reorganization provision. A sole proprietorship may want to look into a bankruptcy under Chapter 13. For some individuals, Chapter 13 may be better as well. This will primarily be determined by the income, or means, of the individual.
Exempt and Nonexempt Assets
Some assets in bankruptcy are exempt and some are non-exempt. Exempt property may not be liquidated and will be kept by the person filing for bankruptcy. Exempt property includes basic necessities, in addition to a small amount of jewelry, etc.
Chapter 7 Process
In a Chapter 7 bankruptcy, the bankruptcy trustee sells the nonexempt property of the person filing for bankruptcy and gives the proceeds of the sale to the person’s creditors.
When the trustee sells the nonexempt property, this is also called liquidation, or liquidating the nonexempt property.
Qualifying for Chapter 7
Not everyone is permitted to file a Chapter 7 bankruptcy. 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 exceptions to this rule.
Purpose and Effect of Chapter 7
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.