The process of bankruptcy is authorized by the United States Constitution, but there are several different types of bankruptcy proceedings. Chapter 7 bankruptcy is the most common form; this provides for the liquidation of assets when a business or an individual declares bankruptcy.
In a Chapter 7 bankruptcy filing, the case is filed in a U.S. Bankruptcy Court, and federal laws govern the proceedings. However, specific state laws usually apply as to how rights to property are determined for both businesses and for individuals.
Individuals who file for a Chapter 7 bankruptcy are allowed to retain certain property, but the remaining assets are liquidated and utilized to pay off as much debt as is possible. The provisions as to which assets are exempt from Chapter 7 liquidation varies from state to state.
In addition to exempt personal properties, most liens, which include home mortgage loans and auto loans, are also retained through Chapter 7 proceedings. Debts such as Federal student loans, child support, spousal support, and court-imposed fines are also rarely discharged through Chapter 7 bankruptcy proceedings.
Other debts such as credit card debt are forgiven. U.S. officials are increasingly watchful for individuals who abuse Chapter 7 bankruptcy as a way to walk away from debt; in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was passed to make the process of qualifying for Chapter 7 bankruptcy more stringent. Additional eligibility requirements for Chapter 7 filing have increased; for example, if an individual's income is high enough, they will not qualify for Chapter 7 bankruptcy.
The Bankruptcy Court requires an individual to produce a number of items, including:
When an individual submits a Chapter 7 filing, creditors are then prevented from collecting their outstanding debts; this process is known as an "automatic stay." This stay provides protection from being sued by creditors and also preserves the individual's personal property until the Bankruptcy Court determines its status.
The process of filing for and completing a Chapter 7 bankruptcy usually takes between three to six months, but it can take longer when the Bankruptcy Courts become overloaded with cases.