A Chapter 7 bankruptcy is a powerful tool, capable of wiping out unsecured debt entirely. Medical bills, credit cards, personal unsecured loans, and civil judgments are a few items that may be entirely wiped out in a Chapter 7 bankruptcy. This means that the person filing the Chapter 7 bankruptcy will not be required to pay back those types of unsecured creditors.
Because of the Chapter 7 bankruptcy's power to wipe out debt entirely, it is reserved for persons who can benefit most, and who are in a position where no other options are available. A person most likely to benefit from a Chapter 7 bankruptcy is one who has a lot of unsecured debt, such as medical bills following a long illness, or a lot of credit card debt. However, a debtor who has a lot of equity in real property or personal property, such as automobiles, investment accounts, boats, furniture, appliances, and electronics, with which the debtor does not wish to part, may want to consider a Chapter 13 bankruptcy.
Chapter 7 is designed as a liquidation of non-exempt property. Under this Chapter, debtors give up non-exempt property that they own at the time they file the bankruptcy case, which is sold by a trustee. The trustee uses the proceeds of the sale to pay creditors. In most cases, however, the debtor does not have any assets over and above what the law allows the debtor to keep, i.e. the property is either exempt under the law or a creditor has a lien that encumbers the equity in the property. Thus, in most chapter 7 cases, the debtor does not give up any property. Still, we call chapter 7 cases liquidation cases.
About 90 days after a chapter 7 case is filed, most debtors get most of their debts discharged. This means the debts have gone away. Some debts, however, do not go away and must be paid after the case. Examples include past-due child support payments, some taxes and student loans. Debts for which the debtor has pledged collateral for the loan (such as cars, homes and household goods) must continue to be paid if the debtor wishes to retain the collateral. See other sections of this site and the FAQ page for information on reaffirmation agreements with secured creditors.
The bankruptcy case addresses only the debts the debtor has at the time of the bankruptcy case. Future debts must always be paid as usual. Debtors are allowed to keep the money that they earn after filing the bankruptcy case, as well as most other property that they obtain after the filing.