When a person or business declares bankruptcy, the law says that they can't pay their debts. A bankruptcy can be asked for not only by creditors who are trying to get what they are owed, but also by the person or organisation that is in debt. If it is hard to pay back debts, declaring bankruptcy may be the best way to get out of debt.
Under the Bankruptcy Code, there are six basic types of bankruptcy. Chapter 7 is the "liquidation" of non-exempt assets to pay off debts. In a court-supervised process, the court chooses a trustee who sells off the debtor's non-exempt assets and gives the money to the creditors. The Bankruptcy Code lets the debtor keep some exempt property, but a trustee will sell off the rest of the debtor's assets.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made changes to the Bankruptcy Code. If a debtor's income is above certain thresholds, the debtor may not be eligible for chapter 7 relief. Most collection actions against a debtor or the debtor's property stop when a petition under Chapter 7 is filed. However, potential debtors should know that filing a petition under Chapter 7 could lead to the loss of property.
After filing for Chapter 7 bankruptcy, you will no longer owe money on credit cards, unsecured loans, hospital, medical, utility, and rent bills that you haven't paid. But Chapter 7 bankruptcy doesn't get rid of debts like state and federal taxes (unless they are more than three years old), child support that is required by law, alimony, government-backed student loans, debts caused by fraud, fines, penalties, or willful damage to another person or property.
In most chapter 7 cases, the debtor gets a discharge just a few months after the petition is filed. This means that the debtor is no longer responsible for certain debts that can be discharged. So, the goal of Chapter 7 bankruptcy is to give the debtor a fresh start and a chance to learn how to handle money well.
