Overwhelming debts can burden us and make it difficult to continue with our lives. Fortunately, the United States Constitution provides various measures and procedures that individuals or businesses can take to reorganize their finances. These measures exist in the form of a bankruptcy filing. One of the most common bankruptcy types is Chapter 7 bankruptcy. Examine this overview of Chapter 7 bankruptcy to understand how it works.
Background
Under Chapter 7, a trustee sells the debtor’s assets and distributes the proceeds to creditors. The court relieves the debtor of all debts before the filing date with limited exceptions. Chapter 7 applies to debtors who cannot repay their debts and do not have valuable assets that can repay creditors.
Process and Mechanisms
In a Chapter 7 case, the debtor must file a petition with the bankruptcy court. To file for Chapter 7 bankruptcy, an individual must first pass the “means test.” This test determines if the individual has the means to repay their debts. If the individual does not have the means to repay their debts, they may be eligible for Chapter 7 bankruptcy.
Alternatively, the debtor can opt for credit counseling. Credit counseling is a process where a person works with a credit counselor to review their financial situation and develop a plan to get out of debt. The credit counselor will work with the person to create a budget and develop a plan to repay their debts. The credit counseling service may also provide other services, such as education on financial management.
Once the debtor sees they are qualified, they can begin the filing process. The debtor must also file a plan to distribute the proceeds from the sale of assets. After the petition is filed, the court will appoint a trustee. The trustee’s duties include selling the debtor’s nonexempt assets and distributing the proceeds to creditors.
Once the trustee has finished selling assets and distributing proceeds, the court will issue a discharge order. A discharge from Chapter 7 bankruptcy is a court order that permanently releases the debtor from most debts.
Once the debtor receives a discharge, they are no longer legally obligated to pay their creditors. Certain types of debt cannot be discharged in Chapter 7 bankruptcy. These debts include child support, alimony, student loans, and taxes.
Consequences
When a business files for Chapter 7 bankruptcy, it liquidates itself. Thus, the business will stop its operations and sell off its assets to pay creditors. The trustee might dissolve the business, and the owners will no longer be responsible for its debts.
While this may sound like a good way to get out of debt, it has some major drawbacks. First, bankruptcy is a very public process, and it can damage your reputation. Second, you will likely lose control of your business and have no say in how it closes its operations. Finally, your creditors may receive full compensation, and you may still be on the hook for some of the debt.
The consequences of Chapter 7 bankruptcy for individuals are similar to those for businesses. You will lose your assets to pay creditors. You will also have a bankruptcy record, which will stay on your credit report for up to 10 years. This record can make it difficult to get new lines of credit or loans. And, like businesses, filing for bankruptcy can damage your reputation.
Consult a professional who can help you with the process of Chapter 7 bankruptcy and guide you on the mechanisms and necessities. Contact us at North Metro Litigators if you require help with this Chapter 7 bankruptcy proceedings.
