What is Chapter 7 bankruptcy?

Bankruptcy is a process created by federal law that provides relief for debtors, who can either eliminate their debts or repay their debts. The Bankruptcy Code is divided into "chapters" for the various types of bankruptcies. A Chapter 7 "liquidation" is the process by which individual debtors are rid of many of their debts. A Chapter 13 "reorganization" is the process by which an individual or a business prepares a plan for repayment of creditors. Bankruptcy is also intended to protect creditors' interests by either dividing a debtor's assets for repayment or creating a plan of repayment.

How does a Chapter 7 debtor get a "clean slate" to begin a new financial life?

Chapter 7 debtors seek to "wipe the slate clean" and start new financial lives. In fact, one of the goals of the Bankruptcy Code is to give debtors a "fresh start," without the burden of overwhelming debt. Once a Chapter 7 debtor has received a "discharge" in bankruptcy, he is no longer responsible for most of his debts. Debts that cannot be discharged or eliminated in bankruptcy include student loans, most tax liabilities, and child support.

The Bankruptcy Code permits debtors to keep some assets or property that are necessary to begin with a "clean slate" or to make a "fresh start." These assets and items are called "exempt property." A debtor may or may not be permitted to keep his home; this depends on a number of factors, including the equity in the home and the "homestead exemption" laws applicable in the state.

Is the slate truly "clean" or are there lasting effects of bankruptcy?

A debtor's slate is clean only to the extent that she is no longer liable to creditors for most debts. The slate is not truly "clean" as the fact of the bankruptcy will remain on a Chapter 7 debtor's credit record for up to 10 years. Given the fact that more than 1 million individuals are filing Chapter 7 bankruptcy petitions each year, the "fresh start" offered by Chapter 7 is seen by many financially strapped debtors as either their best or their only option.

Converting a Chapter 13 to Chapter 7

A Chapter 13 bankruptcy filing may be converted into a Chapter 7 bankruptcy filing. One common reason for converting from Chapter 13 to Chapter 7 is a petitioner's inability to stay current in the Chapter 13 repayment plan. A petitioner may not convert a Chapter 13 to a Chapter 7 if the petitioner has already received a Chapter 7 discharge within the previous eight years.

A Chapter 7 bankruptcy does not involve the filing of a plan of repayment as in a Chapter 13 case. Rather, a Chapter 7 case involves the bankruptcy trustee gathering and selling the debtor's nonexempt assets, from which creditors will receive distributions in accordance with the provisions of the Bankruptcy Code. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors.

In a Chapter 7 bankruptcy, unlike a Chapter 13 bankruptcy, the petitioner is required to give all nonexempt property to the trustee, who will sell it to pay the petitioner's creditors. However, very few people actually lose property in a Chapter 7 bankruptcy. A petitioner that originally filed a Chapter 13 bankruptcy might not want to convert to Chapter 7 if that petitioner has substantial equity in his or her house, motor vehicles, stamp or coin collections, substantial investments, expensive jewelry or family heirlooms because these items are subject to the Chapter 7 exemption limits. Therefore, conversion of a Chapter 13 to a Chapter 7 may result in a loss of property.

One benefit to sticking with a Chapter 13 is the impact on the petitioner's credit report. Although both types of bankruptcy can be reported legally by credit bureaus for 10 years from the date of filing, the major credit bureaus have voluntarily agreed to remove Chapter 13 bankruptcies after seven years from the date of filing.

Discharge of Indebtedness

Bankruptcy is a process created by federal law that provides relief for debtors, who can either eliminate their debts or repay their debts. Chapter 7 "liquidation" is the process by which debtors wipe out or "discharge" many of their debts. Chapter 7 is known as "straight" bankruptcy. Chapter 13 "reorganization" is the process by which an individual or a business prepares a plan for repayment of creditors.

Does a Chapter 7 debtor truly "wipe out" all debts?

Discharge of indebtedness is the process by which a Chapter 7 debtor eliminates a debt during bankruptcy proceedings. A creditor or lender cannot collect a debt that has been discharged. The debtor is freed from his financial obligation. However, not all types of debts can be liquidated in a bankruptcy proceeding. For example, a Chapter 7 debtor, even though he or she "liquidates" his or her debts, generally cannot discharge child support payments, taxes, or student loan payments. When a debtor chooses to file under Chapter 11 or Chapter 13, the debts usually remain for future payment.

What debts can be discharged in "straight" bankruptcy?

Generally, most unsecured debt is dischargeable in "straight" bankruptcy. A Chapter 7 debtor is usually granted relief from having to pay the following types of debts:

• Unsecured or personal loans

• Medical and dental bills

• Court ordered judgments

• Repossession deficiencies

• Claims in automobile accident or negligence cases

Depending on the circumstances, a debtor may be granted a discharge of the following types of debt:

• Divorce property settlements

• Debts incurred by dishonesty, fraud, or concealment

• Amounts received by embezzlement

• Judgments due for intentional or willful torts

• Some taxes, including some "old" income taxes

• Some student loans, but only in very limited "undue hardship" situations

• Balances due on credit cards, except purchases made with the intent to file bankruptcy