Chapter Seven bankruptcy refers to the type of bankruptcy that is used by individual consumers.

Chapter Seven bankruptcy is often referred to as “the straight liquidation,” because the Chapter Seven process consists of selling the consumer’s non-exempt assets to satisfy the consumer’s debts. Unpaid debts or debts that exceed the sales proceeds of non-exempt assets are generally discharged or canceled. This debt cancellation is what it means to obtain a “fresh start” from bankruptcy.

Laws enacted in October 2005 now impose a number of restrictions on Chapter Seven bankruptcies. Specifically, the law now provides a “means test” for determining whether someone is entitled to proceed under Chapter Seven bankruptcy, or whether they have to proceed under Chapter Thirteen bankruptcy (Chapter 13 bankruptcy involves establishing a repayment plan to pay debts over a period of time).

The “means test” has two parts. First, an individual’s income is analyzed to determine if he or she can repay at least 25% of his or her (unsecured non-priority) debts, less certain allowed expenses. Second, the individual’s income is compared to the average income for the individual’s state, which is based on data collected and published by the IRS.

If the individual fails this test, then the individual will not be entitled to proceed under Chapter Seven bankruptcy.

Assuming that the individual is able to proceed with a Chapter Seven bankruptcy, a bankruptcy trustee will be appointed. The trustee’s function is to preserve the assets of the bankruptcy estate and to liquidate the bankruptcy estate assets, with an eye on maximizing the proceeds for the individual’s creditors.

The Chapter Seven bankruptcy trustee will:

• initially meet with the bankrupt individual
• obtain possession of and review information about the individual’s exempt and non-exempt assets
• classify the individual’s assets as exempt and no-exempt
• notify and hold a creditors meeting
• liquidate or sell the bankrupt individual’s assets
• pay the proceeds to the individual’s creditors, based on order of priority

This process will usually take four to six months. After this period, the bankruptcy court will generally discharge the individual’s unsecured and unpaid debts.