What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is designed to help individuals and/or small businesses liquidate assets and repay creditors to resolve longstanding financial disputes. An individual who opts for Chapter 7 bankruptcy does not necessarily lose all of his or her real assets or properties, similar to Chapter 11 for businesses, or Chapter 13 personal bankruptcy. Typically, Chapter 7 bankruptcy estates are overseen by entities known as trustees, which are responsible for redistributing proceeds and nonexempt assets to creditors in an organized system.

When an individual files for Chapter 7 bankruptcy, state district courts can automatically put a stay on any further actions of creditors to recoup loses or otherwise harass the debtor for remuneration. In other words, with a number of notable exceptions, one being that debtors may still receive home mortgage notices, debtors can “liberate” themselves from letters, telephone calls, and other actions by their creditors.

That said, once an individual files for Chapter 7 bankruptcy, he or she must face several hurdles on the road to financial normalcy. Foremost, Chapter 7 bankruptcy stays on permanent records for many years, the number of years that your bankruptcy will stay on your credit report depends on the circumstances of the bankruptcy. In addition, security for secure debts may be seized by creditors after bankruptcy proceedings are complete.

For instance, if you've secured a $150,000 loan with a boat that's valued at $120,000, your Chapter 7 bankruptcy may discharge your debt of $30,000 in unsecured moneys ($150,000 minus $120,000), but your creditor may then seize your collateral (the boat) at a later date. That said, if your security gains value after the settlement, you may be entitled to keep the proceeds, or your creditor may be entitled to garnish those proceeds.

The nuances of Chapter 7 bankruptcy are often set out in state laws. Although individual filings are overseen by the US district courts' bankruptcy courts, in many cases, federal law leaves it up to states to “fill in the blanks” concerning the rights and responsibilities of parties (debtors, creditors, trustees) involved in the financial reorganization.