Individuals who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 (“straight bankruptcy”, or liquidation).
In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property.
Liens secured against property, such as a house or car, survive the liquidation. If the debtor wants to keep the secured property they must pay at least the value. The non-exempt assets, if any, are sold (liquidated) by the trustee and those funds used to repay creditors. Most unsecured debts (such as credit cards) are discharged by the bankruptcy proceeding.
Some debts are considered to so important that Congress decided those debts were non-dischargeable.
Common exceptions to discharge include child support, alimony, income taxes less than 3 years old and property taxes, most student loans and fines and restitution imposed by a court for any crimes committed by the debtor.
The law requires that all debts must be listed on bankruptcy schedules, even if not dischargeable.
The law also requires that the debtor list all assets in their schedules. Failure to do so can result in a criminal referral to the Department of Justice for prosecution.
Fully secured creditors will retain their lien against the collateral.
The secured creditor may seek a court order allowing them to repossess the secured collateral (house or car). Fully secured creditors are not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make.
Frequently Asked Questions about a Chapter 7
Can I keep My House If I File Bankruptcy?
What Happens to Student Loans in Bankruptcy?