Bankruptcy is the legal process of liquidating or reorganizing the assets of a debtor in order to satisfy obligations to creditors. Bankruptcy filers can be individuals or businesses, and the court can either sell off the assets entirely---or nearly all of them in the case of individual bankruptcies. They can also work out a reorganization, in which the debtor pays off at least some of the debt over time. Chapter 7 of the U.S. Bankruptcy Code deals with liquidation bankruptcies for both businesses and individuals.
Sources of Information on Chapter 7 Bankruptcy
The best and most reliable source of information on Chapter 7 bankruptcies is an experienced bankruptcy attorney licensed to practice in your state. Bankruptcy is a very specific area of legal practice, and has its own federal court system specifically dedicated to it. You can also visit the U.S. Bankruptcy Court web page (see Resources) or legal consumer websites.
How Chapter 7 Bankruptcy Works
Chapter 7 bankruptcy may be appropriate when the debt load is so severe and beyond the capacity of the debtor to repay even a portion of the proceeds. Under a Chapter 7 bankruptcy, businesses shut their doors and cease operations entirely. All assets are stripped and sold off under court supervision. Individuals may have to sell off some assets, although there are a number of exemptions under state law. The proceeds from the sale go to pay off creditors. Debts that cannot be paid off through the liquidation of assets is discharged, or written off.
Non-dischargeable Assets
Not all debts are dischargeable in bankruptcy. Tax debts less than three years old, court-supervised alimony and child support payments and federally guaranteed student loans cannot be discharged in bankruptcy. Neither can fines or criminal penalties arising from malicious damage you do to other people or their property. This includes judgments for damages you inflict while driving under the influence. You also cannot discharge debt you deliberately ran up while filing for bankruptcy.
Personal Exemptions
While businesses can be fully liquidated in bankruptcy, the courts understand you cannot fully liquidate a person. State laws vary in specifics, but individuals are generally allowed to keep a limited number of assets. Typically, they may keep a few thousand dollars in cash or less, a very modest car, tools and books related to a trade, and a few thousand dollars worth of clothing, furniture and personal items.
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