Bankruptcy and the Law (Chapter 7)

Written by: Caroline Kim

July 14, 2025

The scope of corporate law varies significantly, encompassing transactional practices including negotiation and contracts as well as a variety of business and legal issues. Today we’ll take a look into bankruptcy, what it is, how it is managed, and how the law works to manage it. As this is a very specific and situational matter, today’s blog will be a summary and first glance look at how filing bankruptcy and the entirety of the process functions. When a business fails, it is known as insolvency; essentially, this means that the business can not “meet its obligations to customers, creditors, and owners with its available income” (Justia). At its core, filing bankruptcy is defined by the United States Courts as helping a person by “discarding debt or making a plan to repay debts”. Bankruptcy is a significant topic to stay informed on, considering 517,308 cases of bankruptcy (both individuals and businesses) were filed in 2024, which was a 14.2% increase from 2023 (Fay). Below is a chart by Fay representing the U.S. bankruptcies from the last decade. 

Once a company files for bankruptcy, business is usually managed by the jurisdiction of bankruptcy court, where a trustee is assigned to oversee the case (Justia). Bankruptcy filings are always filed in federal court, where judges determine the eligibility and determine whether or not to discharge the debt (Fay). Another key feature of bankruptcy filing is the automatic say, which pauses all legal proceedings against the debtor from moving forward. The consequences for consumers in relations with a bankrupt business ultimately varies on the nature of the relationship and business- whether the company has a consumer’s property, deposit, or owes services. Though bankruptcy can provide many benefits, it can also ensue many consequences such as preventing you from getting new lines of credit, you could lose valuable assets, and it could impact future job applications among many other consequences (Fay). There are 6 different types of bankruptcy that can be filed depending on which best suits the situation; the different types are chapter 7, 9, 11, 12, 13, and 15. Today, we will focus on the core of chapter 7, following up in the next few weeks on the remaining chapters. 

Chapter 7 provides for “liquidation” of non-exempt assets to pay off debt; non-exempt assets can refer to cash, cars, homes, and more (U.S. Courts). There are a few eligibility requirements in chapter 7 such as a means test (to determine if the filing is abusive), credit counseling within 180 days of filing, and must not have had a prior bankruptcy case dismissed within 180 days. The process for chapter 7 involves petition filing involving financial schedules and tax documents, automatic stay (discussed previously in above paragraph), a meeting of the creditors where a debtor answers questions, and a trustee who administers assets and creditors. The major documents required include a list of creditors, assets, liabilities, income, and expenses; for individuals, credit counseling certificates, debt repayment plans, and more. According to the U.S. Courts, a discharge “releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor”. Individual debtors receive discharge in 99 percent of chapter 7 cases, meaning very few are denied. 

All in all, chapter 7 of the bankruptcy is based on liquidation bankruptcy that various groups can file for. It is one that very few are denied, and proves to have a very high discharge rate of 99 percent. 

Sources:

1. United States Courts. (2025, July 1). Bankruptcy. U.S. courts.gov. https://www.uscourts.gov/court-programs/bankruptcy 

2. Fay, B. (2025, March 24). Bankruptcy statistics [updated for 2025]. Debt.org. https://www.debt.org/bankruptcy/statistics/ 

3. Justia. (2024, October 18). Business Bankruptcy & Consumer Rights under the law. https://www.justia.com/consumer/consumer-protection-law/bankrupt-businesses/ 

4. Fay, B. (2025b, April 25). Bankruptcy: How it works and consequences. Debt.org. https://www.debt.org/bankruptcy/ 

5. U.S. Courts. (2025, July 1). Chapter 7 - Bankruptcy Basics. United States Courts. https://www.uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics