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Most commonly, disputes between debtors and creditors are settled informally.If that is not possible the dispute will have to be handled by the courts.
Individuals To file Chapter 7, the debtor files a petition with the local bankruptcy court.In many cases, unsecured bondholders receive only pennies on the dollar. Liquidation is usually the last step in the effort to repay debt.However, the steps preceding liquidation usually involve bankruptcy, which -- at the individual level -- virtually ruins a person's credit for several years, making it very difficult and expensive to borrow money in the future.Filing the Chapter 7 petition automatically stops most collection actions against the debtor, including lawsuits, garnishments, and phone calls. If all the debtor's assets are exempt or subject to liens, there may not be any assets to liquidate and hence no money to distribute to creditors.If there are assets to liquidate, however, the creditors usually file a written claim so that they can receive some of the proceeds.Alimony, child support, and student loans generally cannot be discharged in a Chapter 7 case, nor can most judgments against the debtor for criminal acts.Businesses The procedure for filing Chapter 7 bankruptcy is very similar for businesses.Public companies must also file a form 8-K with the SEC to notify shareholders of the bankruptcy proceedings.Most companies do not file Chapter 7 until they've been unsuccessful with a Chapter 11 filing, which lets them attempt to restructure the company and restore the ability to service debt.(In some cases, creditors can force a debtor into Chapter 7 by filing the petition themselves.) The debtor must provide the court with financial and tax information, as well as a list of creditors and outstanding debts.In most cases, the court also requires proof that the individual has obtained credit counseling. trustee (or the court itself, in some states) then appoints an impartial trustee to handle the case and liquidate the debtor's assets.