How Chapter 7 Works
When someone files for Chapter 7 bankruptcy, the court assigns a trustee to manage their case. The trustee reviews all the person's property and debts. Any assets that are not protected by law are sold, and the money goes to pay creditors. After this process, most remaining debts are forgiven, giving the person a fresh financial start.
What Debts Get Erased
Chapter 7 eliminates most unsecured debts, which are debts not tied to property. This includes credit card balances, medical bills, personal loans, and overdue utilities. However, some debts cannot be erased, such as student loans, child support payments, alimony, recent income taxes, and criminal fines. Secured debts like car loans and mortgages may also require special handling.
What Property You Keep
People filing for Chapter 7 do not lose everything. Each state has exemption laws that protect certain property, such as a primary home up to a certain value, a car, household items, clothing, and tools needed for work. The amount of protection varies by state. A bankruptcy lawyer can explain which of your possessions are protected in your state.
Eligibility Requirements
Not everyone qualifies for Chapter 7. The court uses a means test to check if your income is low enough. If your income is above the state's median, you may not qualify, or you might be required to file Chapter 13 instead, which involves a repayment plan. You must also complete credit counseling before and after filing.
Benefits and Drawbacks
The main benefit of Chapter 7 is that most debts are eliminated relatively quickly, stopping collection calls and lawsuits. The drawback is that it seriously damages your credit score for 10 years, making it harder to borrow money, get a job, or rent housing. Filing also becomes public record, and there are court fees and attorney costs involved. 
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