Bankruptcy is a last-resort option for individuals and businesses that have too much debt to control. One type, chapter 7, involves near-complete liquidation of the petitioner's assets in order to give him a mostly clean slate.

Eligibility

The U.S. Court System states that any individual, partnership or corporation can file for chapter 7 bankruptcy relief. To file this type of bankruptcy, individual debtors must first attend credit counseling meetings.

Debtor Process

The debtor must first file his case with a bankruptcy court, which involves filing fees required by law. He must provide the court with documents explaining his current financial and debt situation.

Immediate Effects

Filing chapter 7 bankruptcy automatically relieves the debtor from collection actions by his creditors for a short period of time. An "estate" is created, which is composed of the debtor's property, minus certain types of exempt possessions.

Long-Term Effects

The bankruptcy trustee will liquidate all nonexempt property without liens to pay off creditors. If there is no property to sell, unsecured debtors will receive no compensation.

Case Conclusion

A debtor who has followed proper procedures will have most of his debt discharged, meaning that the creditors cannot collect on the debt anymore. Any secured creditor can still repossess property, such as an automobile, if the debt is not reaffirmed.

Non-Dischargeable Debts

After bankruptcy, the debtor will still be responsible for certain debts, such as taxes, child support and alimony payments.

Source:

U.S. Courts