What is chapter 7 bankruptcy?
Under a Chapter 7 Bankruptcy, a debtor surrenders his or her non-exempt* property to a bankruptcy trustee. The trustee then liquidates the assets and distributes the proceeds to the debtor’s unsecured creditors. In exchange, the debtor is entitled to a discharge of some or all of the debt. As for secured debts (e.g. Car loans, home loans), the debtor can either surrender the property to the creditor/lender or they can reaffirm the debt. To reaffirm the debt, means to continue payments and keep the obligation/liability. If the debtor chooses to surrender the property (give it back to the lender), the debt is discharged. The debtor must qualify by household income and a “means” test to be able to file under Chapter 7.
*Exemptions are state specific and include such items as your home, car and some personal assets. Your attorney can help you determine your exemptions and also work with you to determine your eligibility using the “means” test. When a debtor cannot meet the eligibility requirements of Chapter 7, then Chapter 13 may be an alternative.