As per the US Bankruptcy Code, Chapter 7 is a legal way to guide a bankrupt and help him/her to pay off all his/her debts to a creditor in an amiable manner. Unlike Chapters 11 and 13 where the repayment tenure is scheduled for a period of 3 to five years, the Chapter 7 enables debtors to repay their debts in a single term.
For example, a business entity faces financial crisis and the situation continues to get deteriorated, forcing the entity to miss monthly installments against the loans it has taken. No doubt, a time will come when the firm will become penniless and prepare to file for bankruptcy in a federal court under Chapter 7. The filing for A Chapter 7 bankruptcy means the business ceases functioning till a trustee of the Chapter 7 confirms the clearance. The trustee is a person employed by the court to estimate and look after both movable and immovable assets of the business enterprise that would be auctioned later.
There is hardly any hard and fast rule to sack employees prior to file for Chapter 7 bankruptcy and in some cases, it has been seen that the new employer that has bought the entity may prefer to retain its old human resource for its smooth functioning.
Now what happens when an individual goes through a phase of financial turbulence like that of the business entity mentioned above. Any person falling short of fund to repay their debts in the stipulated time frame can file for Chapter 7 bankruptcy in a federal court. The bankrupt must handover all his/her movable and immovable assets to the federal for auctioning. In fact, the money collected from the auctioning of assets would have been used to repay the debts of the creditor.
Under Chapter 7 bankruptcy, the individual is entitled to get some sorts of relief such as real estate mortgages and security interests for car loans. However, there is a variation in the calculation of exempted property valuation from state to state. Chapter 7 Bankruptcy hardly covers debts with respect to child support, income taxes less than 3 years old and property taxes, student loans, and fines and restitution imposed by a court for any crimes committed by the debtor.