Chapter 7 bankruptcy, often called a liquidation or straight bankruptcy, is the most common type of bankruptcy proceeding. In a Chapter 7 case, a debtor is allowed to exempt (keep) all or a certain portion of his or her property. In most cases, the debtor keeps all property. However, each person and situation is different, and the actual amount that can be retained (the “exempt” amount) by a specific debtor is determined by the market value of the debtor’s property in terms of dollars, the type of the property owned by the debtor (for example, a retirement account), and/or the manner in which the property is owned by the debtor (for example, whether the property is owned individually by the debtor or jointly by the debtor and a spouse).
Property that a debtor is entitled to keep is called “exempt property” and property that the debtor is not entitled to keep is considered “non-exempt property.” A Chapter 7 Trustee is appointed by the bankruptcy court to collect the non-exempt property of the debtor, sell it, and distribute the sale proceeds to creditors. However, the vast majority of Chapter 7 bankruptcies are “no-asset” bankruptcies in which the debtor is permitted to keep all of his or her property and nothing is distributed to creditors.
Although a liquidation case can rarely help with secured debt (the secured creditor still has the right to repossess the collateral if the debtor falls behind in the monthly payments), the debtor will be discharged from the legal obligation to pay unsecured debts such as credit card debts, personal loans, court judgments, garnishments, medical bills and utility arrearages. However, certain types of unsecured debt are allowed special treatment and generally cannot be discharged. These debts include some student loans, alimony, child support, criminal fines, and some taxes.
Although it is very possible that a debtor will be able to keep a house, car and remainder of the debtor’s other property in a Chapter 7 case, our firm strongly recommends that debtors consult experienced, knowledgeable legal counsel to determine the exemptions that will be available to them in their particular case.