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Paul Lorenzetti
(717) 304-9524
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RE/MAX of Lebanon County
1518 Cumberland Street
Lebanon, PA 17042
(717) 270-8808
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Steven Levengood
(717) 821-3837
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COMMERCIAL REAL ESTATE
Berks, Dauphin, Lancaster, Lebanon and Surrounding Counties
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.
Business Chapter 7:
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.
Individual Chapter 7:
Individuals can file for bankruptcy in a federal court under Chapter 7, "straight bankruptcy", or liquidation, or Chapter 13, a "reorganization", or debt adjustment case. In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Most liens, however survive. The value of property which can be claimed as exempt varies from state-to-state. Other assets, if any, are sold (liquidated) by the interim trustee to repay creditors. Many types of unsecured debt are cancelled. Common exceptions to discharge include child support, most taxes, most student loans, and fines and restitution imposed by a court for any crimes committed by the debtor.
A disadvantage of filing for personal bankruptcy is that a record of it stays on the individual's credit report for 10 years. This may make credit less available and/or terms less favorable. That must be balanced against the removal of actual debt from the filer's record by the bankruptcy, which tends to improve creditworthiness. Future ability to obtain credit is dependent on multiple factors and difficult to predict.
Another aspect to consider is whether the debtor can avoid a challenge by the United States Trustee to his or her Chapter 7 filing as abusive. One factor in considering whether the U.S. Trustee can prevail in a challenge to the debtor's Chapter 7 filing is whether the debtor can otherwise afford to repay some or all of his debts out of disposable income in the five year time frame provided by Chapter13. If so, then the U.S. Trustee may succeed in preventing the debtor from receiving a discharge under Chapter 7, effectively forcing the debtor into Chapter 13.
It is widely held amongst bankruptcy practitioners that the U.S. Trustee has become much more aggressive in recent times in pursuing abusive Chapter 7 filings. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has clarified this area of concern by making changes to the U.S. Bankruptcy Code that include, along with many other reforms, language imposing a means test for Chapter 7 cases