A bankruptcy case filed under chapter 7 of the bankruptcy code, which is also known as the liquidation bankruptcy, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, converts them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. The majority of cases filed under chapter 7 are commonly referred to as “no-asset cases.” This means that all of the property in the bankruptcy estate is exempt from liquidation and the debtor retains ownership over all of his or her property. While in most chapter 7 cases, the debtor retains all of their property, in a case where the property of the bankruptcy estate exceeds in value the amount exempt from liquidation, the bankruptcy trustee will convert the excess property to cash and distribute it to creditors. A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court.
In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed.
Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.