What Is Chapter 7 Bankruptcy?

by Craig Peters, Contributing Writer   

When most people think "bankruptcy," they really mean Chapter 7 of the Bankruptcy Code. Under Chapter 7, a person's assets are liquidated (i.e., turned into cash) in order to wipe away debt and start over financially.

Often referred to as "straight bankruptcy," Chapter 7 is the most common form of bankruptcy in the United States, personal or otherwise. For the 12-month period ending September 30, 2007, for example, Chapter 7 filings accounted for slightly more than 60 percent of all bankruptcy filings in the United States.1

Let's take a look at some Chapter 7 bankruptcy basics:

Does everything a person owns get liquidated under Chapter 7?

No. Under Chapter 7, certain property is exempt from liquidation. In some cases, most property may be exempt from liquidation. Laws vary from state to state.

Is Chapter 7 appropriate for someone with excessive credit card debt?

No. In such cases, the court is likely to order the individual to file Chapter 13 bankruptcy so that a best effort to repay the debt can be made.

What's the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy?

Under Chapter 7, non-exempt assets are liquidated in order to pay off a portion of eligible debt, which is then erased. Under Chapter 13, debt is reorganized in order to make it easier for the individual to pay. Someone filing under Chapter 7 will typically have significantly less income than someone filing under Chapter 13.

Can businesses file Chapter 7 bankruptcy too?

Yes, but individuals file the vast majority of Chapter 7 bankruptcies. Only about two percent of Chapter 7 filings for the 12-month period ending September 30, 2007, were made by businesses.1

How will Chapter 7 bankruptcy affect my credit rating?

A personal bankruptcy filing will remain on your credit report for 10 years and may affect both your ability to obtain credit and the rates you pay if you do obtain credit.

Before filing any form of bankruptcy, be sure to consult a personal finance specialist who can examine your situation and help you decide on the best course of action.

Footnotes
1 Bankruptcy Statistics, USCourts.gov