subject: An Explanation Of Chapter 7 Bankruptcy [print this page] Chapter 7 bankruptcy is available, subject to certain conditions, to both individuals and companies. It must not be taken lightly and any decision to start bankruptcy proceedings should be subject to detailed considerations first.
Business is often about taking calculated risks, Unfortunately, sometimes the calculations prove to have been flawed, resulting in economic difficulties, and ultimately, bankruptcy.
Whether it is a big or small enterprise, the rules for filing for chapter 7 bankruptcy are the same. Chapter 7 is often the preferred chapter of choice, as it allows a clean slate and the opportunity for a financial restart.
Chapter 7 is often the preferred chapter for filing bankruptcy, because despite having to sell all personal posessions and company assets, chapter 7 leaves one debt free. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act was introduced partly to ensure that creditors were paid in full, in those situations where the individual or business could in fact repay its debt in full, subject to a rescheduling of debt repayments.
Under the act, the applicant now has to prove that even with a rearrangement of their debt under a 3-5 year repayment plan, they cannot afford to repay their debts. In simple terms, chapter 7 applicants are now in many cases subject to a means test to prove that they cannot continue to work and repay their debts over time. If it is shown that they can, a chapter 13 bankruptcy will be applied, which provides for an agreed repayment plan.
However, should it be found that the applicant for chapter 7 cannot afford to repay their debts over time, chapter 7 will be granted.
Where chapter 7 is granted, all assets are liquidated and the proceeds allocated to the various creditors. At the time the application is filed, the court will automatically grant "automatic stay", which means no creditor may contact the debtor in pursuit of payment. This often comes as a relief to the applicant, who is then free from letters and calls from those to whom they owe money.
If a business is the subject of a chapter 7 filing, then the management is sacked and control passes to the trustee, whose job it is to liquidate the assets and try and balance the books.
After 10 years, the bankruptcy is removed form one's credit record.
