Bankruptcy Chapter 7 Law and Legal Definition

There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Not dischargeable in bankruptcy are alimony and child support, taxes, and fraudulent transactions. To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. Filing a bankruptcy petition automatically suspends all existing legal actions and is often used to forestall foreclosure or imposition of judgment. After 45 or more days a creditor with a debt secured by real or personal property can petition the court to have the "automatic stay" of legal rights removed and a foreclosure to proceed. When the court formally declares a party as a bankrupt, a party cannot file for bankruptcy again for seven years.

Chapter 11 bankruptcy allows a business to reorganize and refinance to be able to prevent final insolvency. Often there is no trustee, but a "debtor in possession," and considerable time to present a plan of reorganization. The final plan often requires creditors to take only a small percentage of the debts owed them or to take payment over a long period of time. Chapter 13 is similar to Chapter 11, but is for individuals to work out payment schedules.

The Bankruptcy Code provides that the following taxes are not dischargeable:

  1. Any tax entitled to priority under Section 507 of the Bankruptcy Code;
  2. Any tax for which a required return was not filed or which a late return was filed if that late return was filed within two years of the Chapter 7 petition;
  3. Any tax for which the debtor filed a fraudulent return or which the debtor otherwise tried to willfully evade. However, such a liability might be dischargeable in Chapter 13.