Chapter 7 – An Overview
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.
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 non-dischargeable, 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.
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.