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What happens in a Chapter 7 bankruptcy?

Kentuckians who are contemplating filing a petition for bankruptcy have two choices: a Chapter 7 dissolution and a Chapter 13 reorganization. The consequences of this choice depend upon a number of factors in each person's financial situation. This post will summarize the potential outcomes of a Chapter 7 filing.

In a Chapter 7 personal bankruptcy, the debtor conveys all of his property that is not exempt from the claims of creditors to the bankruptcy trustee. The trustee is an official appointed by the bankruptcy court to take possession of the debtor's property. The trustee will prepare an inventory of the debtor's property and all of the debts disclosed by the debtor.

During the course of the bankruptcy proceeding, the trustee oversees the conveyance of property to creditors that hold security interests. For example, a bank that holds a mortgage as security for a real estate loan may well regain possession of the property if it is not sold to another party at the foreclosure sale. The trustee will also sell all non-exempt property that is not subject to a lien. The proceeds of the sale of the debtor's property will then be used to repay the debtor's secured and unsecured debts.

After the debtor's property is sold, the trustee will provide a report to the court, the debtor and all creditors. Unsecured debts will be discharged to the extent they remain unpaid after liquidation of the debtor's property. Secured debts must be paid to the extent that sale of the collateral that secured repayment of the loan was insufficient to repay the entire principal amount and accumulated interest. Some debts, such alimony, child support and educational loans cannot be discharged in bankruptcy.

The choice to file for a Chapter 7 can be difficult. A consultation with a lawyer who is experienced in handling bankruptcy cases can provide helpful information on which debts are dischargeable, whether the debtor's financial situation justifies the costs of a bankruptcy and the likely outcome of the bankruptcy proceeding.

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