When you file Chapter 7 bankruptcy, also called a 'straight bankruptcy' or a 'liquidation', you are asking creditors and the court to forgive all of your debt. In exchange, you forfeit almost all of your assets to help payoff as much debt as possible.
Your assets will be surrendered to the US Bankruptcy Court Trustee, who will sell them. The proceeds from the sale will be distributed to the creditors starting with the secured debts, then the unsecured debts. The trustee also receives a portion of the money as pay for doing the work.
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Chapter 7 bankruptcy has become more difficult to file since 2005, when new bankruptcy laws were passed. Now, if you have a monthly income and tangible assets, you may not be able to file for Chapter 7 bankruptcy. If you have enough income to pay a monthly payment on your debt (in addition to your monthly living expenses), you may have to file Chapter 13 bankruptcy. Your lawyer will advise you on what type of bankruptcy, if any, you qualify for.
You will have to surrender all of your assets, but there are ways to keep your home in a Chapter 7 bankruptcy. Your mortgage payment must be up to date and you can only have a small amount of equity in the home. You must also be able to make the monthly mortgage and tax payments. This is an area where you definitely want to consult a bankruptcy lawyer.
When you file Chapter 7 bankruptcy, the trustee and creditors will sit down with you and determine if you should have your debts forgiven, or 'discharged'. Any debt that are not discharged will be your responsibility until you pay them. The other, discharged debts will show on your credit report as discharged in bankruptcy for seven to ten years.
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