UK Accounting Glossary
Chapter 7 is a section of the US Bankruptcy Code under which a company or an individual can declare bankruptcy. A Chapter 7 bankruptcy is also known as a liquidation bankruptcy. Once a Chapter 7 filing is made, the US Bankruptcy Court appoints a trustee. With a Chapter 7 bankruptcy, the trustee takes an inventory of all non-exempt assets and liquidates them. The proceeds are then used to repay eligible creditors of the Chapter 7 bankrupt party. Chapter 7 creditors are ranked according to the credit risk they took – the lower the risk, the higher the likelihood of being repaid. In accordance with the absolute priority rule, under a Chapter 7 bankruptcy, shareholders are paid after creditors. With a Chapter 7 bankruptcy, a company will need to stop all business activities and turn over its assets. Once the Chapter 7 bankruptcy proceeding is completed, the individual or the company will be relieved of all debt obligations and will be able to start anew. In 2005, Chapter 7 was significantly changed with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act which made it much more difficult to be eligible to file bankruptcy under Chapter 7.
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This glossary post was last updated: 4th February 2020.