A Chapter 7 bankruptcy cancels most debt completely. It is
the most commonly utilized form of bankruptcy. Generally, a Chapter 7 will
discharge (or eliminate) unsecured
debt and any secured debts you surrender to provide you a fresh start. However,
some debts can't be discharged for example child or spousal support, debt
based on fraud, or student loans.
In Chapter 7 a trustee is appointed
by the court to take over and administer your property. A Chapter 7 provides
for a liquidation (or sell-off) of the debtor's assets, but only those assets
that are not exempt. In the vast majority of cases the debtor's assets will
be exempt from the bankruptcy trustee taking them (in other words, protected
so that you may keep those assets). However, any assets that are not exempt,
may be required to be turned over to the trustee for liquidation. The trustee
will then distribute any proceeds to creditors according to priorities set out
in the bankruptcy code.
Any person whose debts consist primarily of consumer debts and value of whose
nonexempt property is less than $150,000 will have to go through a legal analysis
called "The Means Test." There is a complex analysis that happens
to see if a person qualifies for Chapter 7 Bankruptcy or not. In a very general
way, if the debtor has too much monthly income over necessary expenses per
month as determined by some complex bankruptcy rules, the debtor may not qualify
for Chapter 7 Bankruptcy and may be required to file a Chapter 13 Bankruptcy
(a re-organization of debt through a 3 to 5 year payment plan) for debt relief.
Creditors whose debts have been discharged in bankruptcy are prohibited from
ever taking any action to collect the debt.
Click here to see where Chapter
7 bankruptcies are held.