Chapter 7 bankruptcy is a popular bankruptcy for individuals and businesses.  While known as liquidation, normally the debtor does not lose any of their property due to the debtor’s ability to exempt much of their property from the Court’s reach.  Once the case is complete and the debtor has received their discharge, unsecured debts are discharged, which means that the debtor no longer owes on these debts. Typically, the discharge takes place about six months after the debtor files the petition with the bankruptcy court clerk. To qualify for Chapter 7, a debtor must pass the “means test.” The means test is a screening mechanism – it keeps those debtors out of bankruptcy who most likely could repay their debts through a well-drafted repayment plan under Chapter 13. The test is also designed to prevent abuse of the bankruptcy system, a policy built into the bankruptcy code. However, debtors whose monthly income falls below the state median income level for their household size can file a Chapter 7.

When an individual files for Chapter 7 bankruptcy, certain property is exempted from the liquidation process. Alabama has exemptions for numerous classifications of property, including homesteads, personal property and fully exempt property (such as reasonable jewelry, clothing, and qualified retirement accounts). Non-exempt assets (such as second homes, personal property above applicable dollar limits) are liquidated for distribution to unsecured creditors. Most unsecured debts are discharged by the bankruptcy proceeding, although there are a few types that may not be discharged, including child support, income taxes less than 3 years old, property taxes, many student loans, and criminal fines and restitution imposed by a court.

When a business files for Chapter 7 bankruptcy, it must cease all operations unless a trustee is appointed to oversee such operations. If a company is large enough, entire divisions might be sold off. Ultimately, the trustee sells all the company’s assets (liquidation) and divides the proceeds to creditors (distribution). An important thing to note is that corporations and partnerships do not have all their debts discharged, as is the case in individual bankruptcies. Instead, the business is dissolved. Depending on the way the company is set up, the owner or equity partners might still be on the hook for outstanding debt.

Call or email our Dothan Chapter 7 bankruptcy attorneys at Boles Holmes White today. You can reach us at 334-366-6086 or email us for your consultation.