Chapter 7 Bankruptcy: A Comprehensive Overview
What is Chapter 7 bankruptcy and how does it work?
Chapter 7 bankruptcy is a form of liquidation bankruptcy that helps individuals get rid of most of their unsecured debt, such as credit card debt and medical bills. How does the process work?
Chapter 7 Bankruptcy Explained
Chapter 7 bankruptcy, also known as straight bankruptcy, involves the sale of a debtor's nonexempt assets in order to pay off creditors. This type of bankruptcy allows individuals to start fresh financially by eliminating most of their unsecured debt.
When someone files for Chapter 7 bankruptcy, their assets are sold by a trustee appointed by the court. The proceeds from the sale are then used to pay off creditors according to a priority system. Secured creditors, those with collateral backing their claims, are paid first, followed by unsecured creditors.
After the sale of assets and distribution of proceeds, the debtor is typically granted a discharge, which means they are no longer legally obligated to repay the discharged debts. However, not all debts are dischargeable in Chapter 7 bankruptcy.
Common debts that cannot be discharged in Chapter 7 bankruptcy include:- Student loans
- Child support and alimony
- Court-ordered restitution
- Certain tax debts
It is important to note that Chapter 7 bankruptcy has specific eligibility requirements, and not everyone qualifies for this type of bankruptcy relief. The first step in determining eligibility is often applying the median income test, among other factors.