Chapter 7 bankruptcy, although the most common form of bankruptcy in the country, is often talked about and not always understood. This type of bankruptcy involves total liquidation of assets and partial forgiveness of certain debts in order to repay remaining debts. Filing Chapter 7 bankruptcy is often the best course of action for individuals or businesses that have significant amounts of debt and not enough income or collateral to repay creditors. Although bankruptcy can seem devastating, it is legally and financially a better route than struggling to repay debts in a financially destitute situation without declaring bankruptcy.

What is Chapter 7?

The term “Chapter 7 bankruptcy” refers to the seventh chapter of the United States’ bankruptcy code Chapter 11. Chapter 7 bankruptcy is declared more commonly than any other bankruptcy form in the country, and involves liquidation of assets. Other types of bankruptcy, such as Chapters 11 and 13, involve reorganization rather than liquidation, and are appropriate in different types of financial stress. Individuals and businesses alike are eligible to file for Chapter 7 bankruptcy when unable to repay significant debts, as long as the individual or business has not had a bankruptcy case dismissed by the federal court within the last three months.

When You Need to File

When an individual or a business ends up in significant debt without the ability to repay the debt in any capacity, it is possible—and in some cases, mandatory, if the creditors are actively seeking repayment—to file for Chapter 7 bankruptcy. This will make it possible to liquidate assets to repay creditors in some capacity, and forgive certain debts to make it more possible to repay the remaining debts. If a company files Chapter 7 bankruptcy, the business will immediately stop operations and may have divisions resold to other companies in order to collect funding for the creditors.

What Happens After Filing

After filing Chapter 7 bankruptcy, you will keep any properties that are exempt from the liquidation terms, but most assets will be liquidated in order to repay debts to creditors.  The vast majority of unsecured debt can be discharged, except most student loans. Generally, child support and recent income taxes are exceptions to discharge, as well as property taxes and fines. In most cases, you will also remain responsible for spousal support and any property settlements resulting from legal separation or divorce.

You should know that after filing, a bankruptcy case can remain on your credit report for a period of up to 10 years. Most debts, if they are allowed to go to judgment, are on your credit report for at least the same amount of time and are collectible for up to 20 years. Furthermore, because a bankruptcy discharge frees the person of competing debts, a new potential creditor would prefer an entry that informs them that the debts are no longer owed, than an entry that informs them that a person is the subject of active collections. Staying in debt without filing bankruptcy is arguably worse for your credit score, and certainly more financially and legally difficult to handle in the long term. A Long Island Chapter 7 attorney specializing in bankruptcy matters can help provide information that is more specific to your business, estate and situation.