What Is Chapter 7 Bankruptcy?


Quick Answer

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is a process where the debtor's non-exempt assets are sold, and the proceeds are given to his creditors to help repay his debts. Any remaining debt is forgiven, or discharged, and the debtor starts over free of debt. As of 2014, assets that may be exempt include a primary residence, a personal vehicle, household goods and clothing.

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Full Answer

In order to qualify for a Chapter 7 bankruptcy, the debtor has to prove that he cannot afford to repay his debt though a means test. This test uses the debtor's income for the six months prior to his bankruptcy filing, and compares it to the median income in the city or town where the debtor lives. If the debtor's income exceeds the median income in his area, he can still file Chapter 7 if he can prove that he does not have sufficient disposable income after paying his eligible monthly expenses. If the debtor cannot pass the means test, then he cannot file Chapter 7 bankruptcy to have his debts discharged, but he may be eligible for another type of bankruptcy. There are some debts that cannot be discharged, including certain tax debts, spousal- and child-support debts, student loans and court fines. State laws come into play, so the procedure and allowances sometimes differ according to the state in which the debtor resides.

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