Chapter 7

Chapter 7 bankruptcy is a legal process that relieves individuals and businesses struggling with overwhelming financial obligations. Known as “straight” or “liquidation” bankruptcy, the Chapter 7 Bankruptcy option allows debtors to eliminate most unsecured debts, including credit card balances, medical bills, and personal loans while protecting certain assets through exemptions provided by law.
Filing for Chapter 7 bankruptcy automatically triggers an automatic stay, immediately stopping most collection actions, wage garnishments, and foreclosures. The court appoints a bankruptcy trustee to manage the case and oversee liquidating the debtor’s non-exempt assets, such as valuable collections or investment properties. The proceeds from the liquidation are then used to repay creditors.
To be eligible for Chapter 7 bankruptcy, debtors must undergo a Means Test. This test evaluates their financial status to determine if they have sufficient income to pay their debts and expenses through a Chapter 13 repayment plan. If the debtor’s income is below the threshold set by the Means Test, they can proceed with filing for Chapter 7.
Once the non-exempt assets are liquidated and the proceeds are distributed to creditors, the court grants a discharge order, which releases the debtor from personal liability for most of the remaining unsecured debts. However, some debts, such as student loans, alimony, child support, and certain taxes, are typically not dischargeable under Chapter 7.
Although Chapter 7 bankruptcy can offer debtors a fresh financial start, it also has significant long-term consequences, including a substantial negative impact on credit scores and the public record of the bankruptcy filing, which can affect future financial opportunities.