The most common form of bankruptcy in the United States, Chapter 7 bankruptcy, is a type of bankruptcy applicable both to businesses and individuals, and it affects these two entities very differently. Chapter 7, Title 11 of the United States Code, governs the process of liquidation of assets, and is often the first step in working through large-scale irretrievable debt problems.
In business, a Chapter 7 bankruptcy happens when a business is heavily in debt, and unable to refinance or to pay its creditors. The company can itself file for bankruptcy – or be forced to file by a creditor – in a federal court. At the point of filing, the business will cease to operate, unless governed in the interim by the trustee of its bankruptcy. This trustee will be appointed almost immediately, and take responsibility for the sale of assets, and distribution of the resultant proceeds. It may result from this, that employees will lose their jobs, although this is not always the case. Very often, entire parts of the company will form part of the company assets, and will simply change ownership.
Going bankrupt under Chapter 7, for an individual or for a company, will not prevent the process of a mortgage foreclosure or repossession, or any secured credit being collateralized by the lender. These loans are exempt under bankruptcy law; however, the fully secured creditors of a person or company filing for bankruptcy, are allowed to take no part in the distribution of liquidated assets, in the wake of a bankruptcy by the trustee.
For individuals filing for Chapter 7 bankruptcy, the story is slightly different, not least because the kind of debt will tend to differ. Certain kinds of property (although not real estate or a car) are exempt from the proceedings. Unsecured debt, once the payments have been met as far as possible by the sale of assets, will be discharged by the proceedings, but there are several debts which cannot be discharged. These can in many cases be characterized as “moral obligations,” given that they include child support, recent income tax, and any criminal fines and restitution which have been imposed by a court. Additionally, spousal support is not covered.
Although these moral obligations are not discharged by a bankruptcy, they are taken into account by the proceedings as they constitute necessary expenditure. The person filing for bankruptcy has to be able to continue paying these support payments and legal obligations, so they cannot be seen as subordinate to unsecured loans and credit.
Once a bankruptcy has been discharged, it stays on the bankrupt person’s credit record in most cases for up to ten years. The general outcome of this is that they’ll find it difficult to obtain credit during that time, but in comparison with the difficulty in gaining credit for those in serious debt, it is a blow worth taking. It is virtually impossible, however, to predict the future credit availability for a bankrupt person. It is also clear that the US Trustee for bankruptcies is becoming harsher in terms of seemingly frivolous filings for bankruptcy, so it is worth remembering that you should be in serious difficulties before filing.