Chapter 7 of the Bankruptcy Code: What Happens Next to Bankruptcy?

When a business becomes incapable of paying its debts, the owner can file for bankruptcy to resolve the issue with the creditor. In some cases, the creditor forces the owner to file for bankruptcy. Chapter 7 of the US Bankruptcy Law enables creditors to recover their investments through specific legal measures. In this provision, the debtor sells the business to cover the debts. If insufficient, other property can be used to repay the balance.

Chapter 7 is differentiated from Chapter 11 and 13 of the same code by its governed transaction. Chapter 11 and 13 cover the reconstruction of the business to improve the revenue and to produce funds for repayment, while Chapter 7 covers the liquidation of assets (the business in particular) to pay off the debt. Depending on the owner's preference and considering the possibility of reviving the business in the end, he may choose either category. Nonetheless, Chapter 7 provides a faster and less strenuous solution.

After filing for bankruptcy, a Chapter 7 Trustee is appointed by the United States Trustee to immediately inspect the business's affairs to figure out the best solution for liquidation. Until sufficient funds are produced through liquidation, the trustee holds power over the assets covered by the liquidation. He is the one who sells the property and transfers the proceeds to the creditors. He executes any approved methodology in dividing the proceeds in case many creditors are involved.

Selling the company after a corporate bankruptcy to accumulate funds does not necessarily mean dissolving the business and terminating all employees from their jobs. Rather, the business can be sold intact to another company. This means its operations will continue, except that the new leadership may make some changes in the protocols and policies being observed. Even the management system may not be affected depending on its effectiveness determined by the buyer. In case of collaterals, the trustee shall determine which and which not to sell.

Filing bankruptcy does not affect the deal made between the business owner and a fully secured creditor. If the debt entails collateral, which has value that equals or exceeds the debt, the fully secured creditor is entitled to recover the collateral in full even if bankruptcy is filed for. However, they are not entitled for any proceeds from the liquidated property determined by the court.

In contrast to corporate bankruptcy, Chapter 7 may not cover all types of debt in a bankruptcy involving an individual. These types include property taxes, student loans, and child support. The individual must pay off these debts in a separate transaction other than the liquidation. The owner can have the remaining property liquidated in another way to cover for the balance.