Congress revamped the bankruptcy laws in 2005, and one of the changes tightened up qualification rules for potential Chapter 7 filers. Under the old rules, the bankruptcy judge could dismiss a Chapter 7 bankruptcy case if the debtor had sufficient disposable income to fund a Chapter 13 bankruptcy repayment plan. (In Chapter 13 bankruptcy, a debtor pays all or a portion of their debts over a length of time -- usually between three and five years.)
The new rules set specific criteria for determining if a debtor would be able to fund a Chapter 13 repayment plan, instead of leaving the decision up to the bankruptcy judge. The rules compare the debtor's income to the median income of a family of the same size in the debtor's state. If the debtor's income is below the median income, the debtor presumptively qualifies for Chapter 7 bankruptcy, 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 to determine if, taking into account certain expenses and debt payments, they have enough income to fund a repayment plan. For details on how the means test works, see Nolo's article The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?
Chapter 7 bankruptcy wipes out most types of unsecured debt. Unsecured debts are those debts which are not tied to property -- like a home or car. Those unsecured debts wiped out by Chapter 7 bankruptcy include credit card debt, medical bills, and gasoline card debt.
However, some unsecured debt is nondischargeable in Chapter 7 bankruptcy -- meaning it is not wiped out. Nondischargeable debts include those for child and spousal support, student loans (except in very limited circumstances), recent debts for luxuries, debts incurred on the basis of fraud (such as lying on a credit application or writing a bad check), and tax debts first due within the previous three years. To learn more about which debts cannot be wiped out in Chapter 7 bankruptcy, see Nolo's articles 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 home is exempt. What is exempt equity? Although the Chapter 7 bankruptcy trustee may sell some categories of your property to pay unsecured debtors, you are allowed to keep a certain amount (and certain types) of property. The amount of property you are allowed to keep is called exempt property.
Bankruptcy law in all but a handful of states allows homeowners to keep a certain amount of the equity in their home -- this is called the homestead exemption. The exemption amount varies by state. If all of the equity in your property is exempt, the Chapter 7 bankruptcy trustee cannot use it to pay unsecured creditors and therefore has no reason to sell your home as part of the bankruptcy. As long as you keep current on your mortgage, the home remains yours. To learn more about homestead exemptions and other ways bankruptcy affects your home, see Nolo's article Your Home in Chapter 7 Bankruptcy.
In some cases, the bankruptcy trustee may sell some of a Chapter 7 debtor's property in order to repay unsecured creditors. However, bankruptcy law in all states allows debtors to keep a certain amount (or certain types) of property -- called "exempt" property. Most states exempt things such as vehicles (up to a certain value), reasonably necessary clothing, reasonably necessary household furnishings and goods, household appliances, personal effects, pensions, tools of your trade (up to a certain amount), home equity (up to a certain amount), and public benefits. Because of the extensive list of exemptions, most debtors end up keeping all or most of their property. To learn more about what property you may or may not keep in Chapter 7 bankruptcy, see Nolo's article When Chapter 7 Bankruptcy Isn't the Right Choice.
For more information on the Chapter 7 bankruptcy process, see How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer and Robin Leonard (Nolo).
Chapter 7 bankruptcy -- also called "straight" or "liquidation" bankruptcy -- is designed to give you a fresh start. It wipes out most types of debt, and in return the bankruptcy trustee sells (liquidates) your nonexempt property in order to provide partial repayment to creditors. But because most people have very little property that is not exempt, most Chapter 7 bankruptcy filers end up keeping most or all of their property. To learn more about Chapter 7 bankruptcy, see Nolo's article A Chapter 7 Bankruptcy Overview.