Definition
A Chapter 7 bankruptcy is a legal process where a debtor’s assets are liquidated in order to partially repay creditors.
Analysis
Most individuals seeking to file for bankruptcy attempt to file under Chapter 7 of U.S. Bankruptcy Code. Chapter 7 is the immediate fresh start that many debtors want so that they can move past their debt and start over.
In order to file for bankruptcy under Chapter 7, individuals must pass a means test. Their income cannot exceed the median area income for their state. Individuals deemed to earn more than that threshold may be forced to convert to a chapter 13 bankruptcy, which reorganizes their debts rather than dissolving them.
The means test was created by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Another change that was implemented as a result of BAPCPA’s passing was a requirement that all filers receive a certificate from a bankruptcy counseling session.
Chapter 7 bankruptcy may dissolve most consumer debts, but it does nothing for child support, property taxes, income taxes less than 3 years old and student loans. Some liens may remain on exempt property that the debtor is allowed to maintain, such as from car loans or from the mortgage on their primary residence.
A Chapter 7 bankruptcy is a public record that also appears on credit reports. Unlike many other negative records that remain for 7 years, a Chapter 7 bankruptcy will remain on a credit report for 10 years.
The debts are discharged once all of the non-exempt assets have been liquidated with the proceeds used to partially repay creditors.
