Chapter 7 Bankruptcy: An Overview

Chapter Seven of the U.S. Bankruptcy code allows debtors to petition a bankruptcy court to discharge, or cancel, much of their debts. This form of bankruptcy is available to individuals as well as certain types of business entities, including partnerships and corporations.

In order to qualify for Chapter Seven, individuals must meet a "means test." Those wishing to file Chapter 7 must issue a statement of their income for the previous six months immediately before filing the bankruptcy petition. In addition, individuals must provide a statement of their monthly expenses and other assets they own.

In most cases, the bankruptcy trustee will look at the person's income and determine whether those debts should be completely discharged, or whether the individual has some ability to repay creditors. If the individual can repay some of the debt, the trustee might require that person to convert to a Chapter 13 bankruptcy.

However, if the trustee determines that the individual's income is such that he cannot repay his debts, the trustee will then review the debtor's assets and determine what should be sold in order to pay some portion of the debt owed to creditors. In many cases, debtors will have to sell their homes and move to less expensive housing.

Other assets, such as stocks and investments, cars and other valuable items may also need to be sold. However, some property is exempt from this process. For example, an older or less valuable car that is the debtor's primary means of transportation is often exempted. In addition, most retirement savings that is kept in a qualified account such as a 401(k) or certain types of IRAs is exempted as well. Most personal property that is of little market value is generally not required to be sold.

These are merely examples of Chapter 7 federal bankruptcy exemptions. Many states have their own exemptions. In Michigan, for example, a bankruptcy petitioner can choose whether to elect federal or state exemptions. Consult with an experienced bankruptcy attorney to discuss your specific situations and what exemptions might apply.

In the end, whatever portion of the total debt that is not satisfied by the sale of assets is discharged, or wiped out, by the trustee. That means that the creditors cannot pursue the debtor for any further payment, and the filer has a fresh financial start..