Chapter 7 bankruptcy is also knows as liquidation. This is when an individual or business asks the court to entirely wipe out, or discharge, all outstanding debts. In exchange for the discharge of debts, all of the business's assets or the individual's nonexempt property is sold, and the proceeds are used to pay off creditors.

The process from start to finish, from the day you file the Chapter 7 papers to the day you receive notice that all debts have been discharged, can be as quick as six months.

Filing for bankruptcy involves filling out several forms and submitting them to the bankruptcy court in your area. The forms supply the court details about the following:

• Any property (exempt and nonexempt) you own now or have owned within the last two years and any property you have given away within the last two years.
• Exempt properties include clothing, furniture, Social Security checks you have not spent yet, and any other basics.
• How much your current income is and where you are employed
• Current monthly living expenses
• Any outstanding debts

After filing the papers through an attorney, a meeting will be schedule called a "meeting of the creditors" during which you give all nonexempt property or its cash value to your attorney with the expectation that your debts will be paid off as much as possible with the money. If the property you are including in the meeting is not worth very much or would be difficult to sell, the property can be "abandoned" and you can keep it. It is because of this that very few people lose property in bankruptcy case. A few months after that, the court will send a notice to you stating that "all debts that qualified for discharge were discharged." That means that your case is over and your debts are settled.

As with Chapter 13 bankruptcy, filing for Chapter 7 causes "automatic stay" to be put into effect, where creditors are prevented from trying to collect money on their debts from you. Until your case is settled, the bankruptcy court is in control of everything you have except any exempt property. This means that you cannot sell anything to pay off your debts without the court's permission.
If the property isn't worth very much or would be cumbersome for the trustee to sell, the trustee can "abandon" the property-which means that you get to keep it. Very few people actually lose property in bankruptcy.

As a result of this process, most of your debts are wiped out, or discharged, by the court. Legally, you no longer owe creditors anything. A discharge is only allowed if the following conditions are met:

• The taxes in question that you need to have wiped out are income taxes only. Other taxes, such as those from a Trust Fund Recovery Penalty, fraud, or payroll, cannot be discharged in a bankruptcy case.
• You did not willfully try to avoid paying your taxes by filing a fraudulent tax return or anything else.
• The tax return for which you are overdue was originally due at least three years before you filed bankruptcy.
• The tax return was actually filed at least two years before filing for bankruptcy.
• The income tax debt was evaluated by the IRS at least 240 days before you file your bankruptcy petition, or has not yet been assessed.

By successfully qualifying for and filing for Chapter 7 bankruptcy, you no longer have any personal obligations to pay your outstanding debts. However, liens recorded before the date of filing remain, and the IRS can seize ay property you owned at the time you filed. Do not be alarmed, though. The IRS rarely takes property unless it is real estate, retirement accounts, or pensions, but even with those, the IRS will only take them if you have not made any efforts to resolve the problem. Another comfort is that when the IRS takes someone's property, it receives negative publicity, and rightfully so. In other words, taking your property makes them look bad and they want to avoid that whenever possible.

Bankruptcy is a confusing matter with the different chapters with their own eligibility requirements. If you would like more information on filing bankruptcy, contact our office for a free case evaluation and assessment of your options.