What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, or “liquidation”, is available to both individuals and businesses. In a Chapter 7, any property you have that is not “exempted” may be sold to pay your creditors and pay down your debt. Any unpaid debt will be discharged at the conclusion of your case.

Frequently, most people who qualify for a Chapter 7 are “no asset” debtors, meaning that they do not have any significant personal or real property that can be liquidated. Thus, in the majority of cases, a Chapter 7 bankruptcy is relatively simple and can be completed within 4 to 6 months.

A Chapter 7 bankruptcy, however, is not ideal for someone who has unexempt property, such a high value car or home with equity. In New York, persons living in rent-subsidized apartments should also avoid filing for Chapter 7 as this is a significant asset whose value cannot be fully protected under either the state or federal exemptions.

Moreover, a Chapter 7 bankruptcy is not ideal for someone who owns property that is secured by a debt (such as a car or home), who is behind on the payments for the secured debts but who still wishes to retain said property. In these cases, a Chapter 13 bankruptcy would be more preferable.

In order to qualify for a Chapter 7, your current monthly income cannot be over your state’s median income for your household size, and you must pass the “means test.” Your current monthly income is determined by averaging your previous six months worth of income. If you have too much disposable income after paying your monthly living expenses, then you may be disqualified from filing a Chapter 7, or you may be forced to convert to a Chapter 13.