Bankruptcy Chapters
Lesson:
Bankruptcy is a legal process governed by federal law that helps individuals or businesses who cannot fully repay their debts to obtain relief from creditors and either restructure or eliminate obligations. Upon filing, an automatic stay goes into effect, halting most collection actions, lawsuits, wage garnishments, and debt pursuits while the case proceeds.
- Chapter 7 bankruptcy, also known as "liquidation," involves a court-appointed trustee selling the debtor’s non-exempt assets to pay creditors, after which most unsecured debts are discharged.
- Chapter 11 bankruptcy, known as "reorganization," allows a debtor (typically a business) to restructure debts and operations under court supervision while remaining in control of the business, subject to creditor and court approval.
An easy way to remember this is that, numerically, 7 comes before 11 in the same way that, alphabetically, liquidiation comes before reorganization.
You're an accountant trying to understand which laws might be relevant to a potential bankruptcy.
You've been briefed with the following facts:
- A small-scale farmer unable to cover equipment loans and credit card debt sells non-exempt farm equipment to pay creditors and clear most unsecured debts.
Which type of bankruptcy is most likely to apply in this case?
Answer:
- Chapter 7 bankruptcy
Explanation:
-
Chapter 7 bankruptcy, also known as "liquidation," involves a court-appointed trustee selling the debtor’s non-exempt assets to pay creditors, after which most unsecured debts are discharged.