What is Chapter 7 Bankruptcy?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 17 February 2020
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Chapter 7 bankruptcy is a form of bankruptcy in which a debtor liquidates assets, with creditors collecting the funds from the sale of the assets. At the end of this process, the majority of the debtor's debts are discharged, allowing him or her a fresh start. In addition to being used by individuals, chapter 7 bankruptcy can also be utilized by businesses. It is the most common form of bankruptcy in the United States.

The process of filing for chapter 7 bankruptcy starts with filing a number of papers with a bankruptcy court. The debtor must demonstrate that he or she is not eligible or able to file for reorganization or a repayment plan, and provide a list of all assets. If the court reviews the information and determines that the debtor can go through a liquidation bankruptcy, a creditor meeting is scheduled in which the debtor and his or her creditors discuss the assets to be liquidated. At this meeting, creditors may agree to take partial repayment of debt. Creditors can also refuse to cancel debt if they believe that the debt was related to fraudulent or unlawful activities, and certain types of debts like student loans cannot be erased under chapter 7 bankruptcy.


Four to six months are required for chapter 7 bankruptcy proceedings, and the process can become quite involved. Some debtors like to use a bankruptcy attorney to handle the bankruptcy, although it is possible to file independently. In either case, certain assets are ruled exempt, which means that they cannot be sold, and creditors may determine that other assets are worthless, and therefore they are treated as exempt, even if they are not. The sale of assets is managed by a trustee, who usually tries to get the best prices possible.

People who file for chapter 7 bankruptcy must agree to attend credit counseling. After filing chapter 7 bankruptcy, it can be difficult to obtain credit for several years, and it is not possible to file for bankruptcy again for a set period of time. Credit counselors can often help people rebuild their credit in the wake of a bankruptcy.

It has become more difficult to file for chapter 7 bankruptcy in the United States, thanks to laws which significantly tightened the bankruptcy rules in the early 2000s. It is a good idea to consult an attorney and an accountant before committing to a bankruptcy filing, because although the professional fees for the consultation may be high, there may be an alternative which has not been considered. A professional consultation can also smooth the way for a bankruptcy filings, if a debtor decides to continue with bankruptcy proceedings.



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Post 1

Filing a Chapter 7 has, indeed, become much more difficult thanks to the bankruptcy reform pushed for by credit card companies back in 2005. That reform has been a failure, according to economists Wenli Li and Michelle J. White.

Li and White maintain that bankruptcy reform has resulted in approximately 800,000 additional mortgage defaults and 250,000 foreclosures since it passed. In a nutshell, the economists found that making bankruptcy less readily available to consumers has increased default rates -- debtors forced into a Chapter 13 bankruptcy under the new reforms have to face higher legal fees and are forced to take on at least part of their unsecured debt (which is what the credit card companies that bought the reform legislation ultimately wanted).

Ah, but at least credit card companies have less risk for going out and making the foolish decision to extend credit to college kids without jobs, huh?

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