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Bankruptcy FAQ

What Is Chapter 7?

Both individuals and businesses may find themselves with more debts than they can pay when due. In such cases, filing for bankruptcy may provide a solution to what seems like an insurmountable problem. Bankruptcy provides two basic forms of relief: (1) liquidation and (2) rehabilitation, also known as reorganization. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code.

Chapter 7 Relief Is Available to Both Individuals and Businesses

Chapter 7 bankruptcies, also called “straight bankruptcies,” are the most common form chosen by individual consumers. In a Chapter 7 consumer bankruptcy, the individual debtor’s estate is liquidated and the assets are distributed to creditors. Partnerships, sole proprietorships and corporations are also eligible to file under Chapter 7. However, unlike individuals, these business entities are not eligible to receive a discharge. Chapter 7 business liquidations are conducted in significantly the same manner as Chapter 7 consumer bankruptcies — many of the business’s assets are sold and the proceeds are divided among the company’s creditors. Partnerships or corporations that wish to keep doing business may decide that Chapter 7 is not the best option because after liquidation and distribution, the business ceases to exist.

Chapter 7 Bankruptcies May Be “Voluntary” or “Involuntary”

Most Chapter 7 bankruptcy cases are filed by the debtor and are thus considered “voluntary bankruptcies.” Not all bankruptcy proceedings are voluntary, however. Under Chapter 7, creditors have the option of filing for relief against the debtor, in which case the proceeding is called an “involuntary bankruptcy.” Involuntary bankruptcies are allowed only when certain minimum thresholds are met; for instance, there must be a minimum number of creditors and a minimum amount of debt. The debtor has the right to file a response to an involuntary petition, after which the court will determine whether the creditors are actually entitled to relief. If the court dismisses an involuntary bankruptcy filing because it has no merit, the creditors may be ordered to pay the debtor’s attorney’s fees, damages for any losses the debtor experienced because of the bankruptcy and even punitive damages to punish the creditors for the frivolous or abusive filing of a petition.

Conclusion

A bankruptcy lawyer can help debtors overcome obstacles to the repayment of debt. Because the Bankruptcy Code affords various forms of relief, including liquidation under Chapter 7, it is recommended that you seek the advice of a lawyer to make the best financial and legal decisions. An experienced bankruptcy attorney can provide you essential advice if you are considering voluntary bankruptcy under Chapter 7.

Copyright © 2011 FindLaw, a Thomson Reuters business

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.

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