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Chapter 7

You need to understand what Chapter 7 bankruptcy is. Here’s what to know.

What is Chapter 7?

Chapter 7 refers to a chapter of the bankruptcy code that provides for “liquidation.” Under Chapter 7, your debt is discharged, but your nonexempt property is sold, with the proceeds distributed to your creditors.

Deeper definition

Bankruptcy exists to give people a fresh financial start. While Chapter 7 allows you to become debt free, it is not without a price. In return for a clean slate, you will be expected to turn over personal possessions for sale.

Depending on the state where you live, your home, pension, car, personal belongings, coin collections, jewelry and other personal property might be liquidated to pay creditors.

Each state has a set of its own exemptions, although 17 states allow you to choose between your state exemptions and federal bankruptcy exemptions laid out by Congress.

California offers two sets of state exemptions for debtors to choose from. If you live in one of the 17 states that allow you to choose between state and federal exemptions, you must choose one. You cannot pick from provisions under both codes.

Exemptions work like this: Say you own a car that is worth $5,000, and the vehicle exemption in your state is $6,000. You would be able to keep your current vehicle.

However, if your car is worth $15,000, the bankruptcy trustee likely will sell your car, pay off the loan and pay you $6,000 for the exemption. Any other money from the sale of the car would go toward repaying other unsecured creditors.

Debt management calculators.

Chapter 7 example

No one wants to file for bankruptcy, given that it stays on a debtor’s credit report for 10 years. If you find yourself unable to pay your bills or put food on the table though, bankruptcy may be the right option. According to FindLaw, Chapter 7 can help in five ways:


  1. You can get a “fresh start.”
  2. You can keep future income.
  3. There is no limit on the amount of debt you can claim.
  4. There is no repayment plan to follow.
  5. The discharge of debt occurs quickly.

Find out about life after bankruptcy.

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