What is a Chapter 7 Bankruptcy?

Chapter 7 is known as “straight” or “liquidation” bankruptcy. It requires a person to give up property which is not exempt under the law, so the property can be sold to pay creditors. Most of the time, those who file chapter 7 keep all of their property except property which is very valuable or which is subject to a lien which they cannot avoid or afford to pay. In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for exempt property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. You usually are given an opportunity to buy back any non-exempt property if you do not want to surrender the property. If you want to keep property, like a home or a car, and are behind on the mortgage or car loan payments, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt. You will have to complete a means test to see if you qualify for a chapter 7 bankruptcy based on your monthly gross income. Based on the means test results, the bankruptcy court may decide that you have to file a chapter 13 case.