---
title: Chapter 7 Bankruptcy Liquidation
description: An overview of the legal framework and process for Chapter 7 bankruptcy, the liquidation of a debtor's non-exempt assets for the benefit of creditors.
keywords: [bankruptcy, chapter 7, liquidation, creditors, assets]
category: law
---

## Introduction to Chapter 7 Bankruptcy

Chapter 7 of the United States Bankruptcy Code, codified at 11 U.S.C. § 701 et seq., provides for the "liquidation" of a debtor's non-exempt assets for the benefit of creditors. This is in contrast to a Chapter 13 bankruptcy, which allows the debtor to retain their property while repaying creditors over a 3-5 year period. The goal of Chapter 7 is to provide the "honest but unfortunate debtor" a "fresh start" by discharging their qualifying debts, while ensuring a fair and equitable distribution of the debtor's available non-exempt assets to their creditors.

## Eligibility and the Means Test

To be eligible for Chapter 7 bankruptcy, a debtor must satisfy the "means test" set forth in 11 U.S.C. § 707(b). This test compares the debtor's average monthly income over the prior 6 months to the median income for a household of the same size in the debtor's state. If the debtor's income is below the applicable median, they presumptively qualify for Chapter 7. If the debtor's income exceeds the median, the court will examine the debtor's disposable income and expenses to determine if filing under Chapter 7 would constitute an "abuse" of the bankruptcy process. See In re Smith, 536 B.R. 493 (Bankr. S.D. Tex. 2015).

## The Bankruptcy Estate and Exempt Assets

Upon the filing of a Chapter 7 petition, an "estate" is created comprising all of the debtor's legal or equitable interests in property as of the commencement of the case. 11 U.S.C. § 541. However, the debtor is entitled to exempt certain property from the estate, up to statutory limits, pursuant to 11 U.S.C. § 522. Common exemptions include the debtor's primary residence, vehicle, household goods, and retirement accounts. The Chapter 7 trustee is tasked with identifying, securing, and liquidating the debtor's non-exempt assets for distribution to creditors. See In re Bauer, 298 B.R. 353 (B.A.P. 8th Cir. 2003).

## The Automatic Stay and Creditor Claims

The filing of a Chapter 7 petition triggers an "automatic stay" under 11 U.S.C. § 362, which prohibits creditors from taking any action to collect on pre-petition debts or seize the debtor's property. Creditors must file a proof of claim with the bankruptcy court by the applicable bar date to assert their right to a distribution from the bankruptcy estate. 11 U.S.C. § 501. Creditors holding secured claims, such as mortgages or vehicle loans, may seek relief from the automatic stay to foreclose on or repossess their collateral. See In re Vizcarra, 546 B.R. 334 (Bankr. D.N.M. 2016).

## The Discharge and Exceptions

Upon the completion of the Chapter 7 process, the debtor is generally granted a discharge under 11 U.S.C. § 727, which permanently enjoins creditors from attempting to collect on discharged debts. However, certain debts are excepted from discharge, including taxes, student loans, domestic support obligations, and debts incurred through fraud or willful and malicious injury. 11 U.S.C. § 523. The debtor may also be denied a discharge entirely if they have engaged in certain types of misconduct, such as concealing assets or failing to maintain adequate records. See In re Retz, 606 F.3d 1189 (9th Cir. 2010).

## Conclusion

Chapter 7 bankruptcy provides a valuable tool for individuals and businesses struggling with overwhelming debt to obtain a fresh financial start. By liquidating the debtor's non-exempt assets and distributing the proceeds to creditors, Chapter 7 seeks to balance the interests of both debtors and creditors in a fair and equitable manner. However, the process is subject to strict eligibility requirements and can have long-lasting consequences, making it crucial for debtors to carefully consider their options and seek the guidance of an experienced bankruptcy attorney.