What Is a Chapter 7?

What Is a Chapter 7?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A Chapter 7 is a type of bankruptcy that allows individuals or businesses to dismiss their debts. Declared under Chapter 7 of the United States Bankruptcy Code, it is often referred to as a “liquidation bankruptcy”. This process involves selling off a debtor’s non-exempt assets to pay back as much debt as possible. Once the liquidation process is complete, most of the debtor’s remaining debts are discharged, the exception being certain types of debts such as student loans or tax arrears. This offers a fresh financial start for many people, although it does impact their credit score significantly.

Related Questions

1. How does a Chapter 7 bankruptcy affect your credit score?

Chapter 7 bankruptcy can significantly lower your credit score. As a public record, it can stay on your credit report for up to 10 years from the filing date, thereby impacting your ability to get new credit during that period.

2. Who is eligible for filing a Chapter 7 bankruptcy?

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According to the Bankruptcy Code, anyone who meets certain income criteria based on their state‚Äôs median income can file for a Chapter 7 bankruptcy. If an individual’s current monthly income over the six months prior to filing is less than or equal to their state’s median income, they may be eligible.

3. What is the difference between Chapter 7 and Chapter 13 bankruptcy?

While Chapter 7 takes care of most unsecured debts via liquidation of non-exempt assets, Chapter 13, in contrast, provides a repayment plan for debtors. This plan allows debtors to keep their property and make structured payments to creditors over a period of three to five years.

4. Can business debts be discharged in a Chapter 7 bankruptcy?

Yes, businesses can discharge their debts under Chapter 7 bankruptcy. However, the business itself stops operations and is dissolved at the end of the bankruptcy process. This is not the case for sole proprietors, who can continue their business operations after filing.

5. What happens after a Chapter 7 bankruptcy discharge?

Once a Chapter 7 bankruptcy is discharged, the debtor is released from personal liability for most debts. This means they no longer need to pay any debts that are discharged. The discharge typically comes about three to six months after the debtor files the bankruptcy petition.