Chapter 7 Overview

• Under Chapter 7, the court creates a separate bankruptcy estate, and transfers the bulk of an individual's assets, or all of a business's assets to the estate. Businesses cease operations completely in a Chapter 7, while individuals are allowed to keep a limited amount of personal assets with which to start over. Everything else is sold off to pay creditors, while most remaining debts are discharged.
  
  

Chapter 7 versus Chapter 13

• Under a Chapter 13 bankruptcy, also called a "wage-earner's bankruptcy," the debtor works with court officials and creditors to create a payment plan over time that satisfies at least part of the debt. Chapter 13 is a less drastic form of bankruptcy than Chapter 7, because Chapter 13 filers typically discharge less debt and pay more debt back to creditors, albeit over a timeframe that can last years.
  
  

Application for Chapter 7

• The courts tend to frown on Chapter 7 filings unless absolutely neccessary, and the debtor has no reasonable hope of satisfying creditors through a reorganization. This is generally because the debtor's income is very limited compared to the amount of the debt. Although bankruptcy is handled in federal courts, each state has established guidelines to help judges determine whether to approve a Chapter 7 petition or force the debtor into Chapter 13 instead. Specifics vary by state, but typically, to qualify for Chapter 7, you must show that your income is below the median income for a family of your family's size in your state.
  
  

Chapter 7 Exemptions

• State law also governs the amount of assets a Chapter 7 individual filer may maintain through bankruptcy. Specifics, again, vary, but most states allow for a limited exemption for a car, tools of a trade, and several thousand dollars worth of clothing, furniture and personal effects.
  
  

Dischargeable Versus Non-dischargeable Debt

• Not all debts can be discharged, even under Chapter 7. Federally-guaranteed student loans are not normally dischargeable, nor are court-ordered child support payments and recent tax debt. It is important to consult with an experienced attorney prior to filing. You may wind up with a black mark on your credit report, but receive very little benefit from a filing if much of your debt is non-dischargeable.