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A chapter 7 bankruptcy is basically a trade — the person who files bankruptcy trades their non-essential or luxury property (for example, a boat, stock options, or expensive jewelry) in exchange for the elimination of their obligation to pay most kinds of debt. In a chapter 7, the person filing is not required to make any payments to creditors from the money that they earn. However, they can choose to continue to make payments for important property that they want to keep, like their home or car.

 

In a chapter 7 bankruptcy, any significant luxury items are turned over to the court so that they can be sold. The money generated from that sale is divided up among the creditors. A share of the sale proceeds is all that creditors receive and, in most cases, the obligation to pay the remaining debt is legally eliminated–called “discharged.” However, there are some kinds of debts that cannot be discharged, like alimony, child support, certain taxes and usually, student loans. For more information about which kinds of debts are dischargeable, you should talk to a lawyer. I’d be happy to talk to you.

 

What if I don’t have any luxury property or significant assets?

 

Even someone who does not have any luxury goods can still be eligible for a discharge of their debt in a chapter 7. In those kinds of cases, called “no asset” cases, the creditors do not receive anything but the obligation to repay the debt is still eliminated. In Massachusetts, because the legislature has been generous in defining what counts as essential, non-luxury property, most chapter 7 cases are “no asset” cases.

 

Can anyone file chapter 7?

 

A chapter 7 bankruptcy is primarily for individuals who really can’t afford to pay anything to their creditors. Based on their income and expenses, they just don’t have the means. But if you do have the means to repay something, you may need to file a chapter 13 bankruptcy instead. You will want to talk to a lawyer about this, too.

Chapter 7 bankruptcy is also available to individuals who have mostly business-related debt, or for businesses that are shutting down.

 

For Businesses

 

When a business files chapter 7, the business is shut down and the business assets are sold to pay creditors. Instead of receiving a discharge, the business is liquidated.

 

It’s important to note that a business’s bankruptcy does not eliminate the obligation of anyone who has co-signed or personally guaranteed the business’s debt.