Chapter 7 bankruptcy can be filed by individuals (called a “consumer” Chapter 7) or businesses (called a “business” Chapter 7). A chapter 7 bankruptcy typically lasts 4-6 months.
In Chapter 7 Bankruptcy, some of your property may be sold to pay down your debt. In return, most or all of your unsecured debts (that is, debts which collateral has not been pledged) will be erased. You get to keep any property that is classified as exempt under the state of federal laws available to you (such as your clothes, car and household furnishings). Many debtors who file for Chapter 7 bankruptcy are pleased to learn that all of their property is exempt.
If you own money on a secured debt (for example, a car loan for which the car is pledged as a guarantee of payment), you have a choice of allowing the creditor to repossess the property; continuing payments on the property under the contract (if the lender agrees); or paying the creditor a lump sum amount equal to the current replacement value of the property. Secured debts cannot be eliminated with a Chapter 7.
Eligibility for Chapter 7
Not everyone can file for Chapter 7 bankruptcy. For example, if your disposable income is sufficient to fund a Chapter 13 repayment plan — after subtracting certain allowed expenses and monthly payments for certain debts — you won’t be allowed to file for Chapter 7 bankruptcy.
To qualify you must pass the “means test”, a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Only bankruptcy filers with primarily consumer debts, not business debts, need to take the means test. High income filers who fail the means test may file Chapter 13 bankruptcy to repay a portion of their debts, but may not file Chapter 7 bankruptcy to wipe out their debts altogether.
However, having to take the Chapter 7 means test doesn’t mean that you must be penniless in order to file Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage payment or a car payment.