What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy (which is sometimes called a "straight bankruptcy"
although this term is not used as frequently as it once was) is a "liquidation bankruptcy," so called because all the property of the debtor is liquidated to pay off debts. It is a roughly 90-day process that wipes the slate clean for almost all dischargeable debts. In a Chapter 7, however, a person’s assets may be at risk and some debts cannot be discharged. Some transfers of property, moreover, can be undone. It can be used once every eight years, and it is carried on a credit report for up to ten years.

A Chapter 7 bankruptcy does not leave a bankrupt destitute and on the street with only the clothes on his or her back. There is a certain class of property, sometimes called "necessities," that cannot be liquidated for debts. As long as the fair market value of each item of personal property does not exceed a certain amount, certain property -- working tools, insurance, household furnishings, radio, television, musical instruments, some savings and checks accounts -- may be exempt or entirely protected.

A person with a large amount of unsecured debt may want to consider a Chapter 7 bankruptcy. Its legal costs must be paid with the filing, not as part of the discharge, and many financially distressed parties cannot afford it.

As mentioned, part of the rationale behind bankruptcy is the elimination of the harshness of the debtors’ prison. Some may believe that bankruptcy is a moral failing; the law, however, does not work in the service of destitution.

Creditors can file for an involuntary bankruptcy under Chapter 7. It is not common, but it is also not unusual.