Chapter 7 Bankruptcy Laws

a. How Chapter 7 Works

b. Chapter 7 Background
c. Chapter 7 Eligibility
d. Alternatives to Chapter 7
e. Role of the Case Trustee
f. The Chapter 7 Discharge

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The chapter 7 of the Bankruptcy Code providing for the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors.

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.

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 law, entire divisions of the company may be sold intact to other companies during the liquidation.

Fully-secured creditors, such as bondholders or mortgage lenders, have a legally-enforceable right to the collateral securing their loans or to the equivalent value, which right cannot be defeated by bankruptcy. A creditor is fully secured if the value of the collateral for its loan to the debtor equals or exceeds the amount of the debt. For this reason, however, fully-secured creditors are not entitled to participate in any distribution of liquidated assets which the bankruptcy trustee might make.

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 11 U.S.C. § 727(a)(1)). 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.

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