Chapter 7 Bankruptcy

See also: Chapter 7 Section of our Washington State Bankruptcy FAQ

Debt Elimination for Individuals, through Liquidation

Often referred to as "Straight Bankruptcy" or "Liquidation", Chapter 7 is intended for individuals with no forseeable means of paying off personal debts. Chapter 7 provides elimination of most or all personal debts, including those from credit cards, medical bills, personal loans, judgments resulting from auto accidents, and remaining balances on repossessed vehicles.

The fast fresh start and complete debt relief of Chapter 7 comes at the cost of "liquidation". Liquidation means that a trustee will be appointed to sell your property and assets, distributing the proceeds to unpaid creditors. This could potentially mean the loss of most or all of your assets, though this is often not neccessarily the case. Effective legal representation is critical in Chapter 7 cases, as a knowledgeable bankruptcy attorney can help you maximize assets retained, including major neccessities like your home and vehicle, provided that your mortgage payments are current and you have only a small amount of equity on your property.

Still, the risk of asset loss means that, in general, Chapter 7 bankruptcy makes the most sense for individuals with large personal debts, and few assets to lose. For someone with steady income that is simply unable to pay debts on time, Chapter 13 may be a more attractive option, as it allows for repayment of debts over an extended timeframe, while guarding against foreclosure and repossession with a greater degree of certainty.

Similarly, if your debts are business-related, Chapter 11 is considered a more flexible alternative. Although Chapter 11 also requires repayment of debt on an extended schedule, it does not require that your business be dissolved (and probably liquidated), as does Chapter 7.

Benefits of Chapter 7

A fast, potentially debt-free fresh start, in as little as several months

Possibility of keeping some/most of your assets

Immediate end of wage garnishment, creditor harrassment, and lawsuits

Discharge of most or all unsecured debt, including credit cards, loans, and medical bills

Drawbacks of Chapter 7

Potential for liquidation of all non-exempt assets

Inability to discharge bankruptcy-exempt debts, including government-funded loans, back taxes, court ordered payments (like alimony and child support), and criminal fines.

Significant negative impact on your credit report, lasting 10 years

Difficulty starting accounts, making payments, and obtaining rentals, as a result of credit impact