What is Chapter 7 Bankruptcy?

These are troubling times, financially. Many people have been struggling. Some are struggling because of high debts, fueled by a loss of job, and some of struggling because of high medical bills. As a result, many people of looking for debt relief and had filed for or looked into bankruptcy protection. How does bankruptcy work?

Bankruptcy allows individuals who are trapped in financial crisis, caused by huge debt, to start fresh financially. The person filing for bankruptcy protection is called the debtor and the person, company or business to whom the debtor owes money is called the creditor. There are essentially two different types of bankruptcy protection available to individual debtors: Chapter 7 (liquidation) and Chapter 13 (repayment plan). This article addresses Chapter 7 bankruptcy.

In a Chapter 7 bankruptcy, the debtor is generally someone who has very few assets but a lot of debt. Under Chapter 7, anything that the debtor may own is used to pay off creditors. Hence, it is essentially a liquidation of the debtor’s assets. To be eligible for Chapter 7 bankruptcy protection, the debtor’s disposable income must be insufficient to fund a repayment plan under Chapter 13.


Under Chapter 7, the types of debts that are generally discharged include:

• medical bills;

• credit card debt; and

• unsecured debt will be discharged.

In return for liquidating the debtor’s assets, most or all of the debtor’s unsecured debts are generally discharged or erased. Unsecured debts are those debts for which collateral was not pledged.

However, the debtor may keep property that is protected under state law. This property, called “Exempt” property, may include property, car (generally paid for), household furnishings, and clothes.

Under Chapter 7, the types of debts that are generally not discharged include:

• spousal support (alimony); 

• child support; and

• secured debt are generally not discharged.

What are secured debts? Secured debts are debts where the debtor owes money on a debt that is secured by collateral. For example, a car loan (or lease) is generally considered a secured debt because the car (for which the loan or lease was taken out) is pledged as a guarantee of payment on the loan itself. 

For secured debts, the debtor generally has the option of allowing the creditor to repossess the property (such as the vehicle that is under loan or lease), continuing to make payments on the property that is under contract (if the lender or creditor agrees), or paying the creditor a lump sum that is equal to the current replacement value of the property. There are some types of secured debts can be eliminated in Chapter 7 bankruptcy.

If you are considering filing for bankruptcy, please give us a call. We will provide you with an honest and complete assessment and educate you as to your options. Please contact us for a free case evaluation.

The Mason Law Firm
225 South Lake Avenue, Suite 300
Pasadena, CA 91101
818-700-8422

The Mason Law Firm
15303 Ventura Blvd.
Sherman Oaks, CA 91403
818-700-8422
Contact us for a FREE case evaluation.

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