Generally, chapter 7 bankruptcy is going to be preferable for most people in financial distress. Chapter 7 is faster, cheaper and less complicated than chapter 13 or other types of bankruptcy. It also doesn't require any repayment of your debts, like a chapter 13 or chapter 11 business bankruptcy.
However, not everyone can qualify for a "straight" chapter 7 bankruptcy. There also may be times when your property could be at risk in a chapter 7, meaning a chapter 13 would be preferable, but this is not usually the case if you've become insolvent.
Highlights of a Chapter 7
A chapter 7 bankruptcy is the most common kind filed by individual debtors, and for good reason. If you've got a lot of credit card debt or other unsecured debts, a chapter 7 will usually cancel all of it. Once your case has been completed, your debts are "discharged" and you are no longer liable to repay any of it.
This is great news for many people who find themselves struggling with monthly bills and looking for a way out. However, in a chapter 7, the bankruptcy trustee does have the power to sell of certain of your property to raise cash for the benefit of your creditors. Let's talk about this.
Property Liquidation in a Chapter 7
When you file for a chapter 7 debt discharge, you must include in your documentation all of your property and assets. The bankruptcy trustee assigned to your case will try to find any valuable, non-exempt property or assets to sell off.
What is Non-Exempt?
Generally, most property will be protected by bankruptcy exemption laws. These laws will protect your primary residence, your car, all of your retirement assets and many other important items.
However, if you have any significant property outside of the "usual" assets, this may be in jeopardy. Non-exempt assets usually include things like a second car that you own outright (with no loan against it), or a second piece of real estate in which you have significant positive equity. See this post on Exemptions and Equity for more detailed information on how exemptions work and what the trustee is looking for.
What if I Have a Non-Exempt Assets?
If you do have non-exempt assets, the trustee will look to sell them. This is only the case if the non-exempt equity is 1.Worth a significant amount of money and 2. relatively easy to sell. The trustee will not spend the effort trying to sell something that is only worth a few hundred dollars, or is too hard to sell quickly.
If you do have something vulnerable to liquidation, like a vacation home that you own with no loan, or a small loan against it, then you may want to consider a chapter 13 instead.
The Typical Chapter 7 Case
In the majority of chapter 7 cases, most people will not lose any property, and will get all or most of their debts eliminated. It really does give most people a "fresh start", so that they can go on with their lives, start building up their credit and get into a sound financial situation.
Want to Learn More?
If you're looking at bankruptcy as a possible solution, see the following resources:
Introductory Guides
Guide to Bankruptcy
Chapter 7 vs. Chapter 13 Bankruptcy
Bankruptcy Questions
Do-It-Yourself Law Books from Nolo Press
How to File Chapter 7
The New Bankruptcy
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