What is a Chapter 7 case?

A Chapter 7 bankruptcy, often referred to as "liquidation", contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor's estate, reduces them to cash, and makes distributions to creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors. 

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 just a few months after the petition is filed.

Filing a Chapter 7 petition "automatically stays" (stops) most collection actions against debtors or their property.  As long as the automatic stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or demand payment.  However, there are a number of exceptions to the automatic stay  (a criminal proceeding, for example), and in some instances the automatic stay may only be in place for a short period of time.

For more information about Chapter 7, refer to the Bankruptcy Basics Guide.