What Is Chapter 7 Bankruptcy?
Bankruptcy is a serious business, so you have to understand it clearly. Chapter 7 of Title 11 in the U.S. bankruptcy code regulates the process of asset liquidation. A bankruptcy trustee is assigned to liquidate nonexempt assets to pay creditors; after the proceeds are exhausted, the remaining debt is dismissed. There are eligibility requirements to declare Chapter 7, such as the debtor has to have had no Chapter 7 bankruptcy discharged in the previous eight years and the applicant must pass a means test. This process is also called "straight" or "liquidation" bankruptcy.
Understanding Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, the absolute priority rule specifies the order in which debts are to be paid. Under this policy unsecured debt is separated into classes or categories, with each class receiving priority for payment. Secured debt is debt backed or secured by collateral to minimize the risk associated with lending, such as a mortgage.
Unsecured priority debts are paid first. Examples of unsecured priority debts are tax debts, child support, and personal injury claims against the debtor. Secured debts are paid next. Last is the payment of nonpriority, unsecured debt with funds remaining from the liquidation of assets. If there are not enough funds to pay the non-priority unsecured debt, then the debts are paid on a pro-rata basis.