Chapter 7 is the most common form of bankruptcy in the United States. Chapter 7 refers to the number of a chapter in the Bankruptcy Code that lists the rules and regulations to be followed during liquidation proceedings. Very simply put, when business files for Chapter 7, it means that the organization intends to sell all its property and use the money to pay off its creditors. The business will then cease functioning.
When the money is distributed to the creditors, secured creditors like bondholders get first priority. Unsecured creditors like vendors who have not been paid for the products delivered to the company are given a lower priority.
This law is slightly different when it comes to individuals. When individuals file for Chapter 7, they are allowed to hold certain pieces of property that are exempt and most liens, like mortgaged property for example, are allowed to be retained by the individual.
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In both personal and business bankruptcy, other property and assets are sold by an interim trustee and the money is given to the creditors. Many kinds of unsecured debt are cancelled. However, there are exceptions like child support, student loans, most taxes, and fines imposed by any court for crimes committed the person will still be responsible for these debts, even after filing for bankruptcy.
This differs from the Chapter 7 filed by an organization. The organization is not granted a discharge of its debts under any circumstances. Once all the assets have been sold and the money distributed among the creditors, if there are still outstanding payments to be made, these debts continue to exist, atleast theoretically.
One of the major disadvantages of filing for Chapter 7 is that it stays on the person's or organization's credit report for 10 years. This makes acquiring credit more difficult, and whatever credit is obtained will be at less than favorable terms. Bankruptcy serverly harms chances the individual may have of obtaining future credit.