Chapter 7: Straight Bankruptcy

Chapter 7 of the federal Bankruptcy Code, sometimes called "straight" or "liquidation" bankruptcy, normally results in an individual being discharged from his or her debts, while being allowed to keep a reasonable amount of property (how much is determined by state law and varies from state to state). Married couples may file individually or jointly, and there often may be strategic advantages to filing one way or the other.

Once a bankruptcy petition has been filed, creditors are automatically stopped from taking any collection action against the debtor. This means that from the moment the case is filed, there can be no lawsuits, no foreclosures, no garnishments, no attachments, and most importantly, virtually no direct communication between creditor and debtor (except through counsel). While there are exceptions (generally when there has been a prior bankruptcy) and some circumstances in which a creditor can have the "automatic stay" lifted, this can be done only after a hearing in the bankruptcy court.

In a straight bankruptcy the court appoints a trustee to oversee the case. If there is property above and beyond the debtor's statutory exemptions, it is the trustee's duty to collect the property, sell it, and distribute the proceeds equitably to creditors. In the typical Chapter 7 case, however, there is little or no non-exempt property, and the debtor can retain all of his property in order to make a fresh start. 

Certain transfers of property made by the debtor within 90 days before filing bankruptcy (1 year in the case of relatives and other "insiders") can be recovered by the trustee and distributed to creditors.

Chapter 7 has certain limitations. Some kinds of debts cannot be discharged (for example, most taxes, fines, student loans, alimony, and debts obtained through fraud). Debtors with sufficient income to repay their debts may not qualify for filing Chapter 7.


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