Financial Dictionary -> Debt -> Chapter7

Chapter 7 is a quoted chapter of the United States Bankruptcy Code, and is often a blanked term used for an individual or company that has gone bankrupt. It more specifically refers to a form of bankruptcy that wipes out all debt in exchange for property that was pledged as collateral.

Chapter 7 is the most common form of bankruptcy and only usually requires one courtroom appearance and a $200 fee.
For a business Chapter 7 bankruptcy occurs when they have reached financial low point where they cannot pay their creditors if they are to continue to operate. If they cannot find a way to raise funds via sale of assets or something similar they can choose to file for bankruptcy, or in some cases the creditors may legally force them in to bankruptcy. By order of the courts the business will cease operation and be liquidated, meaning all assets and divisions of the business are sold off to cover the debts.

Individuals can also file for chapter 7 bankruptcy if they own property or a business within the United States. Similar to businesses, the individual's assets (some may be exempt) are liquidated and sold off to cover debts.

Bankruptcy is listed on the individual's credit score and remains there for up to 10 years. During this time frame it is extremely hard to get any type of loan, credit card and sometimes even a new bank account.

The downside of bankruptcy is that businesses and individuals are usually in so much debt that the liquidation process rarely covers all the debt owed, so creditors often only end up with a fraction of what they are entitled. This is the risk lenders take when assessing credit worthiness.

Equally shareholders in a company that goes bankrupt rarely receive any compensation for their investments.