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What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is the most common form of bankruptcy, generally undertaken when your debt has become unmanageable. It's also known as liquidation bankruptcy, straight bankruptcy, or even personal bankruptcy, although companies can also file under Chapter 7. In a Chapter 7 bankruptcy, you hand over all non-exempt assets to a Bankruptcy Court, which sells them, and distributes the sales proceedings among your creditors. The process usually takes about four months to complete.

How do you file for it?

Filing for a Chapter 7 bankruptcy has several steps.

Fill out a bankruptcy petition. Here, you will list all your assets (house, car, bank accounts, investments, insurance, and so on) and all your outstanding debts. Some property is exempt to a Chapter 7 bankruptcy under federal or state laws. In some states, for example, you can hold limited equity in your home or vehicle and retain personal effects, whereas in others, you could lose your home.

Once you've done this, a stay is granted. This step is intended to give you an opportunity to “catch your financial breath” as you consider what to do next. It means that your creditors can no longer pursue you for debt repayment.

Meet with the trustee and creditors. Usually 20 to 40 days after filing for bankruptcy, a meeting is held of the trustee, you, the debtor, and your creditors. The trustee will review your application, and satisfy all parties that you are aware of the potential consequences of the bankruptcy. The bankruptcy judge does not attend this meeting. It's also rare for creditors to show up in these proceedings.

What are the advantages and disadvantages?

The main purpose of a Chapter 7 bankruptcy is to give you a fresh start, by wiping out a debt load that has become unmanageable. For some debtors, a Chapter 7 bankruptcy can mean a new lease on their financial life. This is a distinct advantage of a Chapter 7 bankruptcy.

There are possible negative consequences to a Chapter 7 bankruptcy. The bankruptcy remains on your credit file for the next 10 years. It will almost certainly negatively impact your applications for credit cards, lines of credit, vehicle purchases and leases, mortgages, and other credit-related applications. Once you've filed under a Chapter 7, you cannot file a petition under a different chapter. Certain debts are not discharged including student debt, most taxes, alimony, and child support, among others.

A bankruptcy should not be undertaken lightly. You must be sure that a Chapter 7 will accomplish what you need in order to put yourself back on the road to financial health.

Bankruptcy Basics

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