Chapter 7 bankruptcy is a liquidation program. Some assets are sold off, and the money is then used to pay down the debt of the person filing. Any remaining debt will be forgiven.
This does mean losing assets, though there are plenty of protections in place so that people can retain a lot of the assets that they need. Extras like jewelry or a very expensive vehicle could be liquidated by the courts.
At the end of the day, what you’re probably wondering is if you’ll be completely out of debt. Does this give you a fresh start? Does it eliminate all of the debt you have?
Most debts will be gone, but it is very important to note that not all of them will qualify.
For example, a lot of your debts that don’t have any collateral, known as unsecured debt, is going to qualify for discharge. You may be able to eliminate your credit card debt, your medical bills and personal loans that you had previously taken out.
That said, debts that typically do not qualify include court judgements that have been made against you, child support payments or back payments that you owe, any back taxes that you have yet to pay and spousal support payments you were ordered to pay in a divorce. You also typically can’t get rid of your student loan debt unless it creates a financial hardship.
Chapter 7 can help you by getting rid of the voluntary debt that you have, but mandatory debt like taxes or court ordered payments still needs to be paid. Student loans are the exception to that rule. If you’re considering bankruptcy, be sure you know exactly what options you have.
Source: Nerd Wallet, “Bankruptcy Basics: How to File for Chapter 7,” Sean Pyles, accessed Jan. 05, 2018