Chapter 7, Title 11, United States Code

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Chapter 7 of the Bankruptcy Code governs the process of liquidation under the bankruptcy laws of the United States. (In contrast, Chapter 11 governs the process of reorganization of a debtor in bankruptcy). Chapter 7 is the most common form of bankruptcy in the United States.

Contents

1 Businesses filing Chapter 7
2 Individuals filing Chapter 7
3 2003 Statistics
4 2004 Statistics
5 See also
6 External links

Businesses filing Chapter 7

When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy in a federal court under Chapter 7. A Chapter 7 filing means that the business ceases operations. A Chapter 7 Trustee is appointed almost immediately. The Trustee generally sells all the assets and distributes the proceeds to the creditors.

This may or may not mean that all employees will lose their jobs. When a very large company enters Chapter 7 bankruptcy, entire divisions of the company may be sold intact to other companies during the liquidation.

Secured creditors, such as bondholders, have a higher-priority claim on the proceeds than unsecured creditors, such as vendors who have not yet been paid for products they previously delivered to the company.

In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge. Only an individual can receive a Chapter 7 discharge (see #redirect ). Once all assets of the corporate or partnership debtor have been fully administered, the case is closed. The debts of the corporation or partnership theoretically continue to exist until applicable statutory periods of limitations expire.

Individuals filing Chapter 7

Individuals can file for bankruptcy in a federal court under Chapter 7 ("straight bankruptcy", or liquidation) or Chapter 13 (a "reorganization", or debt adjustment case). (Although individuals can technically file Chapter 11 bankruptcies, those filings are rare.) In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Most liens, however (such as real estate mortgages), survive. The value of property which can be claimed as exempt varies from state-to-state. Other assets, if any, are sold (liquidated) by the interim trustee to repay creditors. Many types of unsecured debt are cancelled. There are 19 (as of 2005) general classes of debt that are not discharged in a Chapter 7. Common exceptions to discharge include child support, most taxes, most student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determinate the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor.

A disadvantage of filing for personal bankruptcy is that a record of it stays on the individual's credit report for 10 years. This may make credit less available and/or terms less favorable. That must be balanced against the removal of actual debt from the filer's record by the bankruptcy, which tends to improve creditworthiness. Consumer credit and creditworthiness is a complex subject, however. Future ability to obtain credit is dependent on multiple factors and difficult to predict.

Another aspect to consider is whether the debtor can avoid a challenge by the United States Trustee to his or her Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to the debtor's Chapter 7 filing is whether the debtor can otherwise afford to repay some or all of his debts out of disposable income in the five year time frame provided by Chapter 13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.

It is widely held amongst bankruptcy practitioners that the U.S. Trustee has become much more aggressive in recent times in pursuing (what the U.S. Trustee believes to be) abusive Chapter 7 filings. Through these activities the U.S. Trustee may be achieving what the Congress and most creditor-friendly commentors have consistently espoused, i.e., a formal means test for Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has clarified this area of concern by making changes to the U.S. Bankruptcy Code that include, along with many other reforms, language imposing a means test for Chapter 7 cases.

Creditworthiness and the likelihood of receiving a Chapter 7 discharge are only a few of many issues to be considered in determining whether to file bankruptcy. The importance of the effects of bankruptcy on creditworthiness is sometimes overemphasized because by the time most debtors are ready to file for bankruptcy their credit score is already ruined.

2003 Statistics

Bankruptcy filings by individuals:

Chapter 7 filings: 1,156,284
Chapter 11 filings: 959
Chapter 13 filings: 468,562

Bankruptcy filings by businesses:

Chapter 7 filings: 21,008
Chapter 11 filings: 9,185
Chapter 12 filings: 698
Chapter 13 filings: 5,201

The total number of bankruptcies rose 7.4 percent over the previous twelve months. These totals were for the 12-month period ending September 30, 2003.

Source: November 14 2003 News Release, Administrative Office of the U.S. Courts. (External link to PDF file: [link])

2004 Statistics

TOTAL bankruptcies:

Chapter 7 filings: 1,153,865
Chapter 11 filings: 10,368
Chapter 12 filings: 238
Chapter 13 filings: 454,412

Bankruptcy cases filed in federal courts fell 2.6 percent in fiscal year 2004 according to the Administrative Office of the U.S. Courts. During the 12-month period ending September 30, 2004, 1,618,987 bankruptcies were filed, down from the 1,661,996 bankruptcy cases filed in fiscal year 2003.