Chapter 7 Bankruptcy FAQs

Both individuals and small businesses can find themselves with more debts than they can pay when due. In such cases, filing bankruptcy may provide a solution to what seems like an insurmountable problem. Bankruptcy law provides two basic forms of relief: (1) liquidation; and (2) rehabilitation, also known as reorganization.

Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. A skillful attorney can advise individuals and businesses alike on whether Chapter 7 may be the right choice for them. The bankruptcy lawyer's goals are to help debtors make a fresh start and ensure that creditors get paid.

Because bankruptcy law is primarily federal in origin, it varies little from state to state. The individual states do, however, retain jurisdiction over certain debtor-creditor issues that are not addressed by and do not conflict with federal bankruptcy law such as which property remains exempt from creditors' claims.

At Rauser & Associates Legal Clinic LLP, we have been helping Ohio client for more than 20 years and have offices in Columbus, Cleveland and throughout the state. Here are basic answers to some common bankruptcy FAQs.

Debts That Remain After A Chapter 7 Discharge

The rules on which debts are discharged, or eliminated, are different depending on which type of bankruptcy is filed. A lawyer experienced in bankruptcy law can advise his or her clients on whether and how particular debts will be affected by a bankruptcy discharge. Generally speaking, in a Chapter 7 proceeding, the following debts are not discharged.

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What Is A 'Discharge' Under Chapter 7?

"Discharge" in the bankruptcy sense refers to clearing the debtor's slate of all, or most, past debts. Although many people expect that filing bankruptcy will wipe out all of their debts, that is not always the case. Bankruptcy only discharges certain debtors of certain debts. The availability of discharge depends on the type of bankruptcy proceeding involved, who the debtor is, and what type of debts the debtor has. An experienced bankruptcy attorney can advise his or her clients as to which debts will be discharged by a Chapter 7 bankruptcy and which debts will remain.

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Exempt Vs. Nonexempt Property Under Chapter 7

In a Chapter 7 liquidation case, the debtor has to turn certain property over to the bankruptcy trustee so that the property can be sold and the proceeds used to pay off debts. Debtors, whether they are businesses or individuals, are often justifiably concerned about what property they will be allowed to keep and what they must give up. Experienced bankruptcy lawyers can answer these and other questions, allay fears, and keep the process moving forward as painlessly as possible.

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Chapter 7 Relief Is Available To Both Individuals And Businesses

Chapter 7 bankruptcies, also called "liquidation bankruptcies," are the most common form chosen by individual consumers. In a Chapter 7 "consumer bankruptcy," individual debtors liquidate their assets in order to be relieved of their debts. The Chapter 7 proceedings begin with the debtor's filing of a petition with the bankruptcy court, which triggers the "automatic stay" — bankruptcy terminology for the termination of all debt — collection activity. The court appoints a trustee who oversees a Chapter 7 case and liquidates the debtor's assets in order to pay off the debts. In many cases, however, the debtor's assets are exempt or already subject to valid liens, so there will be no assets to liquidate. If there are assets, the trustee collects the sale proceeds in a fund from which the debts are paid to the extent possible. When all of the proceeds are distributed, any remaining unpaid debts are discharged, meaning that they no longer exist and the debtor has no further obligation to pay them. Some debts, however, are nondischargeable, such as taxes, damages resulting from the debtor's willful or malicious acts, debts incurred by giving false financial information, domestic support obligations, and some debts incurred just prior to filing for bankruptcy.

"Commercial bankruptcy" is a remedy available to businesses that are unable to pay their debts. Chapter 7 business liquidations are conducted in significantly the same manner as Chapter 7 consumer bankruptcies. In other words, many of the business's assets are sold and the proceeds are divided among the company's creditors. When the debtor is a corporation, it ceases to exist after liquidation and distribution, and there is therefore no reason for further discharge because the creditors cannot seek payment from an entity that no longer exists.

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Chapter 7 Bankruptcies May Be 'Voluntary' Or 'Involuntary'

Most Chapter 7 bankruptcy cases are filed by the debtor and are thus considered "voluntary bankruptcies." Not all bankruptcy proceedings are voluntary, however. Under Chapter 7, creditors, too, have the option of filing for relief against the debtor, in which case the proceeding is called an "involuntary bankruptcy." Involuntary bankruptcies are allowed only when certain minimum thresholds are met; for instance, there must be a minimum number of creditors and a minimum amount of debt. The debtor has the right to file a response to an involuntary petition, after which the court will determine whether the creditors are actually entitled to relief. If the court dismisses an involuntary bankruptcy filing because it has no merit, the creditors may be ordered to pay the debtor's attorneys' fees, damages for any losses the debtor experienced because of the bankruptcy, and even punitive damages to punish the creditors for the frivolous or abusive filing of a petition.

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Nonbankruptcy Workouts

The term "workout" is used to describe a nonbankruptcy negotiated modification of debt. More simply stated, a workout is an agreement worked out between a debtor and his or her creditors for repayment of the debts between them, which is negotiated without all the procedural complications — and perhaps the stigma — of the bankruptcy process. Lawyers experienced in bankruptcy and debtor-creditor law can advise both debtors and creditors on whether a nonbankruptcy workout may be their best course of action.

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Chapter 7 Resource Links

American Bankruptcy Institute Consumer Corner
General information regarding debt and bankruptcy

Chapter 7
FAQ from Mortgage101.com