Chapter 7
Liquidation under a Chapter 7 filing is the most common form of bankruptcy in the United States.
Businesses filing Chapter 7
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 (liquidation) or Chapter 11 (reorganization). A Chapter 7 filing means that the business intends to sell all its assets, distribute the proceeds to its creditors, and then cease operations.
This may or may not mean that all employees will lose their jobs; when a very large company enters Chapter 7 bankruptcy, it may be that entire divisions of the company are sold intact to other companies during the liquidation.
Secured creditors, such as bondholders, have a higher-priority claim on the proceeds than unsecured creditors, such as vendors who have not yet been paid for products they previously delivered to the company.
Individuals filing Chapter 7
Individuals can file for bankruptcy in a federal court under Chapter 7 (a "straight bankruptcy") or Chapter 13 (a "reorganization"). In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property, but all other assets are sold to repay creditors. All unsecured debt is cancelled, with certain exceptions, such as child support and fines imposed by a court for any crimes committed by the debtor.
A series of reforms adopted in the early 2000s have made it more difficult for many debtors to file for Chapter 7 bankruptcy, mandating Chapter 13 instead if the bankruptcy court determines that the debtor could reasonably pay off at least 25 per cent of the total debts within five years, based upon the debtor's projected income over that period and other factors.
The disadvantage of filing for personal bankruptcy is that a record of it stays on the individual's credit report for 10 years, and most creditors will not risk lending money to such an individual - although due to the fact that Chapter 7 bankruptcy cannot be filed more than once by the same person in a six-year period, some lenders are willing to make loans to someone who has filed for bankruptcy under this chapter, but at exorbitant, sometimes approaching even usurious, interest rates.
2003 Statistics
Bankruptcy filings by individuals:
- Chapter 7 filings: 1,156,284
- Chapter 11 filings: 959
- Chapter 13 filings: 468,562
Bankruptcy filings by businesses:
- Chapter 7 filings: 21,008
- Chapter 11 filings: 9,185
- Chapter 12 filings: 698
- Chapter 13 filings: 5,201
The total number of bankruptcies rose 7.4 percent over the previous twelve months. These totals were for the 12-month period ending September 30, 2003.
Source: November 14 2003 News Release, Administrative Office of the U.S. Courts. (External link to PDF file: )
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