Welcome to the SmallBusiness.com WIKI
The free sourcebook of small business knowledge from SmallBusiness.com
Currently with 29,259 entries and growing.

WIKI Welcome Page
Local | Glossaries | How-to's | Guides | Start-up | Links | Technology | All Hubs
About · Help Hub · Register to Edit · Editing Help
Twitter: @smallbusiness | Facebook | Pinterest | Google+

SmallBusiness-com-logo.jpeg

In addition to the information found on the SmallBusiness.com/WIKI,
you may find more information and help on a topic
by clicking over to SmallBusiness.com and searching there.


Note | Editorial privileges have been turned off temporarily.
You can still use the Wiki but cannot edit existing posts or add new posts.
You can e-mail us at [email protected]


Chapter 7

SmallBusiness.com: The free small business resource
Jump to: navigation, search

Chapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States.

For businesses

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. A Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 Trustee. A Chapter 7 Trustee is appointed almost immediately. The Trustee generally sells all the assets and distributes the proceeds to the creditors.

This may or may not mean that all employees will lose their jobs. When a very large company enters Chapter 7 bankruptcy, entire divisions of the company may be sold intact to other companies during the liquidation.

Fully-secured creditors, such as collateralized bondholders or mortgage lenders, have a legally-enforceable right to the collateral securing their loans or to the equivalent value, a right which cannot be defeated by bankruptcy. A creditor is fully secured if the value of the collateral for its loan to the debtor equals or exceeds the amount of the debt. For this reason, however, fully-secured creditors are not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make.

In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge—instead, the entity is dissolved. Only an individual can receive a Chapter 7 discharge. Once all assets of the corporate or partnership debtor have been fully administered, the case is closed. The debts of the corporation or partnership theoretically continue to exist until applicable statutory periods of limitations expire.

Methods of filing for bankruptcy

Federal bankruptcy forms

Functionally, templates are more or less the computer based equivalent of paper bankruptcy forms. The official Federal bankruptcy forms prescribed in the Federal Bankruptcy Rules come as Microsoft Word and Adobe Acrobat formatted templates where each bankruptcy form is represented by a Word or Acrobat file. While these forms are electronic in nature and reside on a computer, they do not contain intelligence that would guide the debtor. The debtor still has to fill in each bankruptcy form separately as they would with paper forms and the debtor still has to grapple with the complexity of bankruptcy law.

Bankruptcy software

In bankruptcy software, the debtor interacts with the software through a web page and is shielded from the actual bankruptcy forms and from the intricacies of bankruptcy law. The debtor responds to questions in an interview setting, much like with tax programs such as TurboTax or automated documents made through HotDocs. The debtor enters names and addresses, a list of their creditors and assets and other financial information and the software generates all the court-ready forms and delivers them to the debtor via email or a download link. The accuracy of the forms is nevertheless imperfect, as it is difficult for software to ensure that the debtor understands what has to be disclosed, what the exemptions for their state are, whether they qualify for said exemptions, and whether expenses included on the means test are allowable.

Bankruptcy preparer

An alternative to do it yourself is the online full-service chapter 7 bankruptcy preparer or online paralegal. This method appeals to those who cannot afford the high cost of bankruptcy attorneys and at the same time do not want the hassle and uncertainty of document templates and software. Bankruptcy preparers fill this need. The bankruptcy forms are prepared by trained individuals rather than by debtor themselves. However, having a preparer or paralegal prepare the petition does not guarantee compliance with all applicable laws, or that maximum advantage exemptions. Preparers and paralegals cannot offer legal advice. As with online bankruptcy software, debtors submit their bankruptcy information through a simple web page interface. Rather than having some software automatically generate the forms, trained paralegals use the information to prepare the document and then deliver them to the debtor. Bankruptcy petition preparers are not licensed to practice law and are not able to provide legal advice. Bankruptcy trustees may scrutinize these petitions more closely, and ensure that paralegals did not offer legal advice.

Bankruptcy attorney

A bankruptcy attorney can advise the consumer on when the best time to file is, whether they qualify for a chapter 7 or need to file a chapter 13, ensure that all requirements are fulfilled so that the bankruptcy will go smoothly, and whether the debtor's assets will be safe if they file. With expanded requirements of the BAPCPA bankruptcy act of 2005, filing a personal chapter 7 bankruptcy is complicated. Many attorneys that used to practice bankruptcy in addition to their other fields, have stopped doing so due to the additional reqirements, liability and work involved. After the petition is filed, the attorney can provide other services.

External links

SB glossary new.jpg
This term or phrase is currently an entry in The SmallBusiness.com Business Glossary WIKI. Please help expand this entry into a more detailed description.
Wiki25.jpg
This entry includes content from the following Wikipedia article: Chapter 7, Title 11, United States Code