Corporate and individual liquidation is governed by Chapter 7 bankruptcy. In a Chapter 7 business bankruptcy, the company is dissolved, and its assets are sold to pay back creditors, at least in part, for the debt that was incurred. Business Chapter 7 bankruptcy filings have stayed around 20,000 per year.
Chapter 7 bankruptcy functions essentially the same for individuals by liquidating assets to pay off outstanding debts. Chapter 7 bankruptcy individual filings can typically total up to 400,000 per year. Chapter 7 business bankruptcy filings are far less common than individual filings. Therefore, it’s best to understand what Chapter 7 bankruptcy is and how it affects the individual who files for it.
First and foremost, before filing Chapter 7 bankruptcy, filers need to know what it is and how it works. Chapter 7 bankruptcy is not a debt settlement repayment plan offering immediate debt relief. Chapter 7 bankruptcy involves selling assets to repay outstanding debts in the order of priority. The assets are sold in a liquidation process, and then the debts are paid based on who is first in line and not who has the highest outstanding debt. Those at the bottom may not receive any repayment for the debt if there are not enough assets.
When there are not enough assets to cover all debts, a lien or mortgage may be placed on any properties owned by the debtor in order to pay off remaining creditors.
Filing for Chapter 7 bankruptcy does put an automatic stay (temporary) on any current debts. Though, there are certain debts that could be exempt from this. As a result, creditors can no longer collect debts, garnish earnings (wage garnishment), initiate a foreclosure, seize a property (repossession), cause an eviction, or cut utilities. Any property will be taken into legal ownership by the court, and a bankruptcy trustee will be assigned to the case to sell and divide assets.
A Chapter 7 bankruptcy can be filed by almost anyone who owns property in the United States, has a permanent residence or business here, or both. Before obtaining a discharge, which is an order that eliminates qualifying debt, the debtor must first satisfy a number of requirements.
Additionally, if a person has previously filed for Chapter 7 bankruptcy, they must wait eight years from the filing date before they are eligible to file another Chapter 7 bankruptcy.
Other than the above requirements, there are no restrictions on when a person can file a Chapter 7 bankruptcy if they meet the qualifications.
Who is eligible for a discharge under Chapter 7 bankruptcy and who must participate in a three-to-five-year Chapter 13 repayment plan are both governed by established standards in bankruptcy? There are a few prerequisites that every filer must meet to be eligible for Chapter 7 bankruptcy:
Once a case is given to a trustee, they will look into the filer’s income to see if they have any disposable income to repay some of their debts. If there is a residual amount left each month, it is likely that trustee will recommend the case be transferred for Chapter 12 bankruptcy.
If it is found that any credit was obtained through misrepresentation or intentionally defrauding a creditor, the case will almost certainly be dismissed. All debts are strictly scrutinized by the trustee to look for any possible red flags before allowing the Chapter 7 bankruptcy.
If someone has recently filed for Chapter 7 bankruptcy and was denied, they must wait 180 days before refiling. Additionally, if a debtor was involved in a Chapter 13 bankruptcy, they must wait six years from that filing before they can apply for Chapter 7 bankruptcy.
The first step in the bankruptcy process after determining that Chapter 7 bankruptcy is the right choice is to file a petition with the bankruptcy court. The proper bankruptcy court is based on where the individual lives, or if filing on behalf of a business, where the principal place of business is, where it is organized/registered, or where the assets are.
When filing the petition, the debtor must also file certain attachments with the court:
Once a petition is filed and accepted by the court, it will be assigned to a trustee. Once it is assigned to a trustee, the filer will need to send a copy of the previous year’s tax return and any tax returns prepared since the filing. There will be additional documentation requirements for those with primarily consumer debts (typically credit card debt).
Those with consumer debts will need to file a credit counseling certificate, a copy of any debt repayment plans, proof of income from an employer for 60 days prior to the filing, monthly net income statements, showing of any anticipated income or future expenses that will be incurred after the filing, and federal or state tuition accounts.
A meeting of creditors will be held by the case trustee between 21 and 40 days after the petition is filed. The debtor is sworn in by the trustee during this meeting, and both the trustee and creditors are permitted to ask questions. According to the provisions of Chapter 7 bankruptcy code § 343, the debtor is required to attend the meeting and respond to inquiries about their financial situation and property under oath.
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