In Chapter 7 Bankruptcy, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who then will liquidate the property and distribute the proceeds to the debtor’s unsecured creditors. In exchange, the debtor is entitled to a discharge (forgiveness) of some debt; however, the debtor will not be granted a discharge if he or she is guilty of certain types of inappropriate behavior (e.g. concealing records relating to financial condition – fraud) and certain debts (e.g. spousal and child support, student loans, some taxes) will not be discharged even though the debtor is generally discharged from his or her debt. Many people in financial distress own only exempt property (e.g. clothes, household goods, an older car) and will not have to surrender the property to the trustee. The amount of property that a debtor may exempt varies from state to state. Chapter 7  bankruptcy is available only once in any eight year period. Usually, the rights of secured creditors to their collateral continues even though their debt is discharged. In the absence of some arrangement by a debtor to surrender an automobile or “reaffirm” a debt, the creditor with a security interest in the automobile  may repossess the car even if the debt to the creditor is discharged.

The 2005 amendments to the Bankruptcy Code introduced the “means test” for describing eligibility for Chapter 7. Any individual who fails the means test will have his or her Chapter 7 case dismissed or may have to convert their case to a nder Chapter 13 filing.

The trustee appointed will usually sell most of the debtor’s assets to pay off creditors. However, certain assets of the debtor are protected to some extent. For example, Social Security payments, unemployment compensation, and limited values of your equity in a home, car, or truck, household goods and appliances, trade tools, and books are protected. However, these exemptions vary from state to state.