Chapter 7

What Is Chapter 7?

Chapter 7 is a bankruptcy category in the United States in which a debtor’s non-exempt assets are liquidated to pay creditors.

Deeper Definition

The Chapter 7 bankruptcy category is also known as “straight” or “liquidation” bankruptcy. It is the most common bankruptcy filed in the United States because it can clear many unsecured debts and give a debtor a fresh start. Typically, a chapter 7 bankruptcy case lasts between four to six months. It involves the sale of the debtor’s nonexempt assets to pay their creditors following the provisions of the Bankruptcy Code.

When a business or an individual files for Chapter 7 bankruptcy, the court will place a temporary stay on their current debts. This prevents creditors from collecting payments on the debt. The court will appoint an impartial bankruptcy trustee to take over the debtor’s assets. The trustee will sell assets classified as non-exempt property and use the proceeds to pay creditors in order of priority. First, the trustee will settle unsecured priority debts, such as child support, tax debt, etc. Secured debts such as a mortgage, auto loan, etc., follow. If funds are remaining, then the trustee will settle the nonpriority unsecured debt.

Each jurisdiction has a list of properties that qualify for the exemption. The debtor’s properties that fall under that exempt property category will not be sold to finance their debts. However, in most Chapter 7 bankruptcy cases, all of the person’s property is exempt, or there’s a valid lien against the property. For instance, if a debtor owes a mortgage, the mortgage has a valid lien against the property. As a result, they will enforce their right to claim the property.

Chapter 7 Example 

Jane lost her job several months ago and has since not been able to secure another one. She is owing to a backlog of debts, including utility bills, credit cards debt, mortgage loan, and car loan. Realizing that interest will continue to accrue on the loans as months go by without payment, Jane decides to file for Chapter 7 bankruptcy to seek relief. At the end of the process, which lasted approximately six months, the court sold off some of Jane’s assets to pay part of her debts and discharged the others.