Chapter 7 is a provision in the Bankruptcy Code that allows an individual debtor to obtain a complete discharge of their debt. Discharge is a “forgiveness” of the debt. In other words, the creditor cannot collect on the debt after a discharge is granted. In chapter 7, in most cases, debtors can dump all of their debt and keep all of their property.
In theory, the discharge is granted after the bankruptcy trustee sells all of the debtors property and reduces it to cash. After the cash is accumulated each creditor will receive its fair share. For example, if there is $10,000 in debt and $1,000 in cash generated each creditor would get .10 on the dollar before the discharge is granted.
However, the bankruptcy code allows debtors to exempt a wide variety of property. This means that the trustee cannot sell it. The exemptions are quite generous. In most cases there will be no property for the trustee to sell and the debtor will obtain a discharge and keep all of their property. The process is quick. It takes approximately four months from the date of filing to complete.
Most people qualify for a chapter 7. However, there are income limitations. Debtors must pass a “Means Test” to be eligible to file under Chapter 7. Please see the article on the Means Test for further discussion.
