Chapter 7
Liquidation under a Chapter 7 filing is the most common form of bankruptcy in the United States.
Businesses filing 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 (liquidation) or Chapter 11 (reorganization). A Chapter 7 filing means that the business intends to sell all its assets, distribute the proceeds to its creditors, and then cease operations.
This may or may not mean that all employees will lose their jobs; when a very large company enters Chapter 7 bankruptcy, it may be that entire divisions of the company are sold intact to other companies during the liquidation.
Secured creditors, such as bondholders, have a higher-priority claim on the proceeds than unsecured creditors, such as vendors who have not yet been paid for products they previously delivered to the company.
Individuals filing Chapter 7
Individuals can file for bankruptcy in a federal court under Chapter 7 ("straight bankruptcy", formally liquidation) or Chapter 13 (a "reorganization", formally debt adjustment case). In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property, and most liens, such as real estate mortgages, survive. Other assets, if any, are sold to repay creditors. Many types of unsecured debt are cancelled. The exceptions include child support, most taxes, most student loans, and fines 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. Consumer credit and creditworthiness is a complex subject, however. Future ability to obtain credit is dependent on multiple factors and difficult to predict. Creditworthiness is only one of many issues to be considered in determining whether to file bankruptcy, and its importance is sometimes overemphasized.
2003 Statistics
Bankruptcy filings by individuals:
- Chapter 7 filings: 1,156,284
- Chapter 11 filings: 959
- Chapter 13 filings: 468,562
Bankruptcy filings by businesses:
- Chapter 7 filings: 21,008
- Chapter 11 filings: 9,185
- Chapter 12 filings: 698
- Chapter 13 filings: 5,201
The total number of bankruptcies rose 7.4 percent over the previous twelve months. These totals were for the 12-month period ending September 30, 2003.
Source: November 14 2003 News Release, Administrative Office of the U.S. Courts. (External link to PDF file: [1] (http://www.uscourts.gov/Press_Releases/fy03bk.pdf))
See also: