Chapter 7 — For Individuals, is usually known as Chapter 7, Liquidation or “Straight Bankruptcy”. The purpose of Chapter 7 is to provide for an orderly, court-supervised procedure of liquidation after taking into account state and/or federal exemptions.
In Chapter 7, the Chapter 7 Trustee takes over the assets of the debtor’s estate taking into account exempt assets (which are not disposed of and remain the property of the Debtor), sells them, and makes distributions to creditors. Most debtors have the right to retain certain “exempt” property. This sale by the trustee is also subject to the rights of secured creditors. There is usually very little or no nonexempt property in most chapter 7 cases. Because of this, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.” A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court.
In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge about 6-9 months after the petition is filed.
Most personal bankruptcy cases filed after October 2005 require a “means test” to be performed to see whether individual consumer debtors qualify for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief and may be forced into either Chapter 13 (and very rarely, Chapter 11).