What is Chapter 7 Bankruptcy?

In Chapter 7 bankruptcy cases are commonly referred to as straight bankruptcy or liquidation cases, and may be filed by an individual, corporation, or a partnership. A Chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in Chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. The Bankruptcy Code will allow the debtor to keep a certain amount of property called "exempt" property; however, potential debtors with valuable assets should realize that the filing of a petition under Chapter 7 may result in the loss of property.  

Chapter 7 bankruptcy is a liquidation legal proceeding.  Upon filing of the bankruptcy petition, the debtor turns over all non-exempt property to the court-appointed bankruptcy trustee, who then converts the property to cash to make a distribution to creditors.  Generally, most assets held by the average debtor are considered to be non-exempt.  In those cases, the trustee files a report of no distribution with the Court to indicate there will be no payment to the creditors. 

The debtor is required to attend a Section 341 hearing which is commonly called the first meeting of the creditors.  The bankruptcy trustee presides at this hearing and the debtor is required to answer specific questions outlined in the U.S. Bankruptcy Code.  Creditors of the debtor are allowed the opportunity to ask questions of the debtor regarding the statements and schedules filed by the debtor with the Court.  Usually after 60 days from the date of the 341 hearing the debtor will receive a discharge which effectively "wipes out" all dischargeable debts.

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