Chapter 7 bankruptcy laws are the domain of federal legislation as authorized by the U.S. Constitution. These laws are designed not only to govern how bankruptcies are handled, but also to dissuade individuals from using bankruptcy as a quick way to get out of debt. In fact, Congress passed legislation in 2005 specifically aimed at preventing bankruptcy abuse by those who would use it even though they have sufficient means to make good on their debts.
In discussing federal Chapter 7 bankruptcy laws keep in mind that they are broad enough in scope so as not to cover every possible scenario. In cases where federal legislation does not adequately address a specific circumstance state law will be used. Therefore, while bankruptcy laws are generally uniform, there may be slight differences from one state to another.
Chapter 7 bankruptcy is a liquidation of assets in which proceeds are used to satisfy creditors. It is designed primarily for individuals and sole proprietors, all of whom are automatically eligible if they meet minimum requirements. Some corporations, partnerships, and LLC’s are also eligible for Chapter 7 under certain circumstances. However, discharge of debts under Chapter 7 only applies to individual debtors. That means that any remaining balances after bankruptcy proceeding has been completed will still be the responsibility of the corporation, partnership, or LLC.
Debts That Can Be Discharged
Chapter 7 bankruptcy laws dictate that there are some debts that can be discharged and others which cannot. Among the dischargeable debts are usually things considered as unsecured credit. This would include your credit card balances, revolving lines of store credit, unpaid medical bills, payday loans, several different types of personal loans, and so on. Being considered dischargeable means that once your assets have been liquidated and the proceeds dispersed, the remaining balances on these debts will be wiped out.
It's important to note that not all debts are dischargeable. In other words, a bankruptcy will not free you from tax liability, alimony and child support, government-funded student loans, mortgages, and some other types of secured credit. It also does not free you from liens placed on your property. When it comes to real estate, a bankruptcy proceeding can only prevent foreclosure during the 3 to 6 months it takes to liquidate your personal assets. Once the bankruptcy has been completed, you are once again a foreclosure target unless you have kept your monthly mortgage payments current.
Laws Regarding Sole Proprietorships
While corporations, LLC’s, and partnerships generally file under Chapter 11, sole proprietorships are prevented from doing so because of their legal status. In other words, where the other three types of business organizations create a legal entity that is separate from the company's owners and officers; there is no legal separation between a sole proprietorship and its owner. The law considers a sole proprietorship a simple extension of the owner's personal assets, which are therefore subject to the bankruptcy proceeding.
As a result of the sole proprietorship's legal standing, a business owner in this situation jeopardizes his non-exempt personal assets when filing Chapter 7 bankruptcy. For instance, while a court cannot seize your primary residence in a bankruptcy proceeding, your vacation property is fair game. A sole proprietor risks not only real estate assets, but also jewelry, collectibles, securities, and other types of personal assets.
Hiring an Attorney
Federal bankruptcy law does provide the opportunity for an individual to represent himself in a bankruptcy proceeding without an attorney. However, the courts regularly discourage this practice due to the complicated nature of the paperwork required. It is recommended that individuals hire an experienced and competent bankruptcy attorney to help them through the process. The law provides that paperwork filled out incorrectly or fraudulently is just cause for dismissal of a bankruptcy petition. Depending on the nature of the dismissal, you may not even be eligible to file a new petition for 6 to 8 years.
Finally, while it's not reasonable to expect the average consumer to know all the ins and outs of bankruptcy law entirely, knowing the basics will provide a good starting point if you are trying to determine whether or not Chapter 7 is right for you. Please be sure to seek the advice of an attorney, financial planner, and credit counseling service before you decide to file a bankruptcy petition.