What is Chapter 7 bankruptcy, and who is eligible?

Minnesota residents who have large amounts of unsecured debt may look to filing for Chapter 7 bankruptcy. Unlike Chapter 13, which involves a reorganization of debt and a repayment plan, Chapter 7 does not require an individual to pay back creditors for debts that are eliminated. However, only unsecured debt can be discharged by this type of filing, and not all debts are eligible; for example, student loans usually cannot be discharged. Additionally, liens on a property are not eliminated.

It is also important to note that someone who files for Chapter 7 may be subject to asset liquidation. While an individual may keep certain exempt property, a trustee will liquidate non-exempt assets and use the proceeds to pay off as much of the outstanding debts as possible.

To be eligible for Chapter 7 bankruptcy, people must pass a means test, which involves either proving that someone makes less than the state's median income or that they have financial obligations that put them in a similar financial situation. Individuals must also have completed a credit counseling course from an approved agency within 180 days before filing. Chapter 7 is also eligible to individual debtors; this type of filing is not available for partnerships or corporations.

While Chapter 7 bankruptcy offers a variety of benefits to individuals with overwhelming levels of debt, it is important that people understand how the process works to ensure that they are aware of possible liquidation of their assets and what is and is not discharged. A bankruptcy attorney may be able to explain the benefits and possible drawbacks of filing and assist someone throughout the process.

Source: United States Courts, "Liquidation Under the Bankruptcy Code", October 24, 2014

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