Significance

• Chapter 7 bankruptcy allows individuals, corporations, partnerships and other business entities to relieve themselves of debt without any requirement for repayment. The process allows the debtor to get a 'fresh start' with finances and rebuild credit. After a petition is filed, the bankruptcy court assigns a case trustee to examine the debtor's assets and accounts and report the findings to the court.
  
  

Function

• Filing for Chapter 7 involves completing a petition with the individual's bankruptcy court that lists the schedule of assets and liabilities, current income and expenditures and a statement of financial affairs. The petition also includes a schedule of contracts and unexpired leases. Debtors who have a significant number of consumer debts (e.g., credit cards or personal loans) must also file a certificate of credit counseling and any information about debt repayment plans allowing the bankruptcy review committee to determine whether the debtor is a good candidate for Chapter 7.
  
  

Benefits

• After the petition for Chapter 7 is filed and approved, the courts command that all collection actions against the debtor are given an 'automatic stay' status. This means the debtor is no longer responsible for paying back the collections amounts, and the collections agency cannot initiate or pursue any lawsuits, garnish wages or contact the debtor by phone or e-mail regarding the account. Chapter 7 also allows a debtor to be relieved of all approved liabilities for life.
  
  

Considerations

• Filing for Chapter 7 bankruptcy has become increasingly difficult and expensive to pursue after the implementation of the Bankruptcy Code on October 17, 2005. In some cases, debtors are required to file for Chapter 13 bankruptcy, where they must repay their debts over a set period of time. Chapter 11 bankruptcy is another alternative filing Chapter 7; this process involves filing a petition under Chapter 11 of the Bankruptcy Code to obtain an adjustment of debts and set up a repayment plan. Individuals cannot file under Chapter 7 if they have received credit counseling from a credit counseling agency.
  
  

Misconceptions

• Unlike Chapter 13 bankruptcy, Chapter 7 does not require repaying any of the debts through a structured repayment plan. The sales of an individual's assets are used to pay the creditors instead, and the debtor's home or other assets may become the property of creditors as a result. However, there are some provisions under Chapter 7 for 'exempt' property. A debtor can hold on to certain assets that meet specific criteria, and this is reviewed with the application. A Chapter 7 bankruptcy discharge also does not remove any liens on the debtor's property; the individual must work out a payment plan to release any liens as needed.