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Chapter 7

Chapter 7 Bankruptcy Explained


Chapter 7 is often referred to as a “straight” bankruptcy or a “liquidation” bankruptcy. Both individuals and corporations are eligible to file. One of the main purposes of Chapter 7 is to give people a fresh start and an opportunity to rebuild.

Businesses normally use Chapter 7 to “throw in the towel and walk away” from the business.   Business operations end and a bankruptcy trustee will attempt an orderly liquidation if there are any assets.  The bankruptcy filing will stop creditor harassment.  Corporations do not get a discharge as compared to individuals.

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Chapter 7 can eliminate unsecured debt, such as credit cards, medical bills, certain income taxes, and repossessions. If a debtor wants to keep secured property like a home or a car, but is behind on the payments, a Chapter 7 case may not be the right choice. A Chapter 7 bankruptcy postpones but does not eliminate the right of mortgage holders or car loan companies to foreclose or repossess your property. Certain other obligations like alimony, recent income taxes and student loans are non-dischargeable. Chapter 7 provides an “automatic stay” that puts an end to collection activities, including lawsuits, bank levies and garnishment of your wages. People like Chapter 7 because it cleans up their credit and is a relatively quick bankruptcy.

To determine eligibility, it is necessary to first review assets. It is important to understand that Chapter 7 could result in the sale of some of your property. However, for most debtors their assets are protected by certain California exemptions. What is exempt is a matter of California law. Second, it is necessary to review income as it is considered to determine if you have the ability to repay a portion of your debts. A calculation is based on a six month average income and then compared to forecasted monthly expenses. Note that most people who are at the point of having to file for bankruptcy relief do qualify.

Once a Chapter 7 case is filed, a bankruptcy trustee is appointed to review your case and has the power to sell non-exempt assets and use the proceeds to pay your creditors. In most cases there is nothing to sell as most property is either exempt or fully secured. Careful consideration is required if you have a recent divorce, own a business, have a recent sale of a business or real estate, have a pending lawsuit, or if you may inherit property.

The goal of a Chapter 7 bankruptcy is to obtain the discharge of your debt. The discharge is granted approximately three months after the bankruptcy filing. After the bankruptcy is complete and discharge is granted, creditors are permanently barred from taking any collection actions against a debtor.


Chapter 7 is a type of bankruptcy that offers individuals a fresh financial start by discharging many unsecured debts (such as credit card debt, medical debt and more). Chapter 7 is sometimes referred to as the “liquidation” bankruptcy because, in theory, your bankruptcy trustee can liquidate or sell off to raise cash any of your non-exempt assets (assets that are not protected by California’s exemption statutes). Most people who qualify for Chapter 7 bankruptcy have few or no non-exempt assets, so liquidation is highly unlikely with proper bankruptcy planning and analysis. Learn more.

Yes. Businesses can also file for Chapter 7 bankruptcy relief. A corporation does not receive a discharge but the business can shut down, turn over its records to a bankruptcy trustee and not have to deal with creditors, pending lawsuits, or collection actions. Learn more.

The bankruptcy automatic stay is one of the first protections offered to those who file for bankruptcy. In most situations, the automatic stay takes effect as soon as the initial paperwork in a bankruptcy case has been filed. Once activated, it protects debtors from all forms of collection. Learn more.

Chapter 7 bankruptcy is a relatively quick process. While a Chapter 13 repayment plan can last several years, Chapter 7 debtors generally get a discharge in about four months from the date of filing. Learn more.

The Chapter 7 Means Test is a qualifying test that a debtor must pass to be eligible to file a Chapter 7 bankruptcy. Most Chapter 7 debtors pass and are eligible for Chapter 7 relief. The means test involves a series of calculations with the aim of assessing whether a debtor has the ability to repay a certain amount to his or her creditors. It first considers the average gross income of the debtor for the six month period before the case is filed. It then compares the debtor’s average monthly income to the median income of a similar sized family in the same geographical area. If you are below median then you automatically qualify for Chapter 7. If you are above median, then there are series of additional expense comparisons and considerations. Every person’s situation is unique and can result in different results on the means test. If a person only has tax or business debt, then he or she is exempt from the means test requirement. A corporation is also exempt. Learn more.

Exempt assets are assets the person filing for chapter 7 bankruptcy can shield from creditors and the bankruptcy estate. In other words, they are untouchable assets. In California, individuals are allowed to claim their home or a portion of their home’s equity as an exempt asset.  For the Greater Bay Area, the homestead amount is $699,421 and it is indexed periodically.   If you do not have a home, you can exempt approximately $34,000 of miscellaneous property including cash and investments. There are separate exemptions for household goods, vehicles and jewelry. Retirement assets are generally exempt and not part of the above calculations.  Each person’s situation is unique in terms of what they can and cannot exempt. Learn more.

A “secured” debt is a debt where you have pledged property (pledged property is known as “collateral”) to ensure your payment of the debt. In other words, if you are unable to pay the debt, the lender can take the collateral and have the collateral sold to generate funds to pay the debt. Common examples of secured debt are your mortgage loan (secured by your house) and your car loan (secured by your car). Sometimes household goods (TV, appliances, etc.) can also be secured to pay the debt owed to the seller of the goods. The repossession and sale of the collateral does not necessarily result in payment in full of the debt. If the sale of the collateral does not result in full payment of the debt, the amount of the shortfall (known as the “deficiency”) will still be owed to the creditor, unless the deficiency is then discharged in bankruptcy. A Chapter 7 bankruptcy will discharge such deficiency claims. Learn more.

Yes, with proper bankruptcy planning and counseling. If you give away, gift, sell for less than fair value, or transfer an asset to someone before you file for bankruptcy, the Chapter 7 bankruptcy trustee may be able to reverse that transfer and recover the property or funds. Transfers made within one year of bankruptcy to or for the benefit of family members may be avoidable. Transfers made within 90 days of the petition date to or for the benefit of general creditors may also be avoidable. Businesses have to be mindful of these rules as payments to insiders (owners of the company) and payments to trade creditors made before the case is filed can be recovered by the Chapter 7 bankruptcy trustee. There are certain defenses like contemporaneous exchange and new value. Specific analysis of each situation is required.

At the end of a Chapter 7 bankruptcy an individual can receive his or her discharge. A corporation will not receive a discharge. A successful Chapter 7 bankruptcy will result in the elimination of most common consumer debts such as medical bills and credit cards. Some types of debts are not discharged including student loans, recent tax debts, debts incurred by fraud, and family support claims. Learn more.

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