Chapter 7 Bankruptcy

Chapter 7 is most frequently used in the case of individuals with consumer debt. Consumer debts are debts for things needed for personal, family, or household purposes. Chapter 7 is appropriate if you have a large amount of debt compared to your income. However, you will not be able to use Chapter 7 bankruptcy under certain circumstances. For instance, if you already received a bankruptcy discharge in the last four to eight years (depending which type of bankruptcy you filed), you will not be able to file for bankruptcy again. Also, if your income is sufficient to pay your expenses and some of your debt, you may be required to file for a Chapter 13 repayment plan instead of Chapter 7 liquidation.

If you file Chapter 7 bankruptcy, you may lose some of your property because it could be sold to pay down your debt. However, you can keep certain property that is called “exempt property.” Exactly what property is exempt will depend on whether you use the federal exemptions in the Bankruptcy Code or the exemptions under New York State law. For instance, your clothes, car, and household furnishings are considered exempt property, so you will get to keep all of that property. The bankruptcy court can only make you sell nonexempt property. Examples of exempt property may include:

• motor vehicles, up to a certain value;
• reasonably necessary clothing;
• reasonably necessary household goods and furnishings;
• household appliances;
• jewelry, up to a certain value;
• pensions, IRAs and 401(K) plans;
• a portion of the equity in your home;
• tools of your trade or profession, up to a certain value;
• a portion of earned but unpaid wages; and
• public benefits (including public assistance, social security, and unemployment compensation that has been saved in a bank account).

Nonexempt property includes all property not designated by federal and state law as exempt. Examples of non-exempt property may include:

• collections of stamps, coins, and other valuable items;
• cash and bank accounts (above a certain amount);
• stocks, bonds, and other investments;
• a second car or truck; and
• a second home or vacation home.

If it turns out that you have some nonexempt property that can be sold, you may have to turn it over to the trustee or give the trustee cash for the value of the property. If the property is not worth much or not worth the effort it would take to sell it, you may get to keep the property even if it is nonexempt. In most cases, your property will either be exempt or will not be worth it for the trustee to sell to raise the money needed to pay your creditors.

Legal Editor: James Shenwick, March 2015 (updated December 2017)