Chapter 7 bankruptcy—also called "straight" or "liquidation" bankruptcy—is designed to give you a fresh start by wiping out many types of debt. In return, the bankruptcy trustee sells (liquidates) your nonexempt property to provide partial repayment to creditors. Many people have very little nonexempt property, so most Chapter 7 bankruptcy filers end up keeping most or all of their property.
A debtor is someone who owes money for an outstanding debt. "Debtor" is also the term used to describe someone who files for bankruptcy relief. A debtor can be an individual or company. By contrast, the "creditor" is the person or business to which the debtor owes money, and a "codebtor" is responsible for a debt along with you. For instance, if your aunt cosigned your loan (signed a contract agreeing to pay for the car if you didn't), your aunt would be the codebtor on the loan. As codebtors, you'd both be responsible for paying off the obligation. Learn more about a consigner's responsibilities in Will Your Cosigner Be Liable for Debt if You File for Bankruptcy?
In Chapter 7, the debtor's household income must be low enough to qualify. Suppose the household income is below the state median income for similar households. In that case, the debtor presumptively qualifies for Chapter 7, although the judge can still require filing under Chapter 13 if the debtor has sufficient income to fund a Chapter 13 plan. If the debtor's income is higher than the median, the rules then look at the debtor's means. If, after considering certain expenses and debt payments, enough income exists to fund a repayment plan, the debtor will qualify. For more details, read The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?
Chapter 7 bankruptcy wipes out most types of unsecured debt. Unsecured debts are debts that aren't guaranteed by collateral property. (A mortgage is a secured debt guaranteed by the home; an auto loan is a secured debt guaranteed by a vehicle.) Unsecured debts wiped out by Chapter 7 bankruptcy include credit card debt, medical bills, and gasoline card debt.
However, you can't wipe out all unsecured debt. For instance, child and spousal support and student loans (except in limited circumstances) are nondischargeable—you'll remain responsible for repaying them after bankruptcy. Some other debts might not be dischargeable if the creditor objects, such as recent debts for luxury goods, debts incurred based on fraud (such as lying on a credit application or writing a bad check), and tax debts first due within the previous three years. Learn more about which obligations remain after Chapter 7 bankruptcy in What Bankruptcy Can and Cannot Do and When Chapter 7 Bankruptcy Isn't the Right Choice.
You will be able to keep your home in Chapter 7 bankruptcy if all of your equity in the house is exempt. What is exempt equity? Although the Chapter 7 bankruptcy trustee can sell some property to pay unsecured debtors, you can keep a certain amount of property, called "exempt property."
Bankruptcy law in all but a handful of states allows homeowners to keep some home equity using a "homestead exemption." The exemption amount varies by state. If all of the equity is exempt, the Chapter 7 bankruptcy trustee can't sell your home as part of the bankruptcy. As long as you keep current on your mortgage, the house remains yours. Learn more in Your Home in Chapter 7 Bankruptcy.
The bankruptcy trustee can sell some of a Chapter 7 debtor's property to repay unsecured creditors, but protections exist. All states allow debtors to keep a certain amount of property known as "exempt" property. Most states exempt property up to a specific value in vehicles, clothing, household furnishings, appliances, pensions, tools necessary in a trade or profession, home equity, and public benefits. The extensive list of exemptions allows many debtors to keep all or most of their property. Learn more When Chapter 7 Bankruptcy Isn't the Right Choice.
To get the facts and find out if bankruptcy could work for you, see The New Bankruptcy: Will It Work for You? by Cara O’Neill (Nolo) or How to File for Chapter 7 Bankruptcy, by Cara O'Neill and Albin Renauer (Nolo).