Definition
Chapter 7 of the 1978 Bankruptcy Act, often referred to simply as Chapter 7, deals with the legal process of liquidation. Liquidation is the sale of a debtor’s nonexempt property, with the proceeds being distributed to creditors. This chapter provides for a court-appointed interim trustee who holds significant powers and discretion to make necessary management changes, secure unsecured financing, and operate the debtor’s business to prevent further losses.
Key Features
- Court-Appointed Interim Trustee: A trustee with broad powers to manage and liquidate the debtor’s nonexempt assets.
- Liquidation: Nonexempt property of the debtor is sold, and the proceeds are used to pay creditors.
- Discharge of Debts: After liquidation, remaining eligible debts of the debtor may be discharged, freeing the debtor from liability.
Examples
- Small Business Liquidation: A small business unable to repay its debts files for Chapter 7 bankruptcy. The court appoints a trustee to take control, sells off the business’s assets, and distributes the proceeds to the creditors.
- Individual Bankruptcy: An individual with overwhelming credit card debt and personal loans files for Chapter 7. The trustee sells nonexempt assets, like a second car or vacation home, to repay creditors. After liquidation, remaining eligible debts are discharged.
Frequently Asked Questions
What happens to the debtor’s property in Chapter 7 bankruptcy?
In Chapter 7, a court-appointed trustee liquidates the debtor’s nonexempt assets to pay off creditors. Exempt assets, which vary by state, remain with the debtor.
Who can file for Chapter 7 bankruptcy?
Both individuals and businesses can file for Chapter 7 bankruptcy. Eligibility is determined by a means test, which assesses the debtor’s income, expenses, and debt levels.
Can all debts be discharged under Chapter 7?
Not all debts can be discharged. Non-dischargeable debts typically include alimony, child support, certain taxes, and student loans.
How long does the Chapter 7 process take?
The process typically takes about four to six months from filing to discharge.
What are the roles of the trustee in Chapter 7 bankruptcy?
The trustee manages asset liquidation, collects and sells nonexempt property, administrates creditor claims, and distributes proceeds to creditors.
Related Terms
Bankruptcy
A legal proceeding involving a person or business that is unable to repay outstanding debts. The process is initiated by the debtor and results in either liquidation or reorganization under different chapters of the Bankruptcy Code.
Exempt Property
Property that is not subject to liquidation during bankruptcy, allowing the debtor to retain ownership.
Trustee
A person or entity appointed to manage the assets of the debtor, handle liquidation, and distribute proceeds to creditors in a bankruptcy proceeding.
Creditor
An entity or person to whom money is owed by the debtor.
Online References
Suggested Books for Further Studies
- “Bankruptcy and Related Law in a Nutshell” by David Epstein
- “The Law of Debtors and Creditors: Text, Cases, and Problems” by Elizabeth Warren
- “Principles of Bankruptcy Law” by Ian Jack Ayres
Fundamentals of Bankruptcy: Business Law Basics Quiz
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