A chapter 7 bankruptcy is the most basic form of bankruptcy. It is commonly referred to as “liquidation.” Business entities and individuals may file for Chapter 7. In Chapter 7, a trustee collects the assets you own that are not exempt under state statute and are unencumbered by liens. These assets are then converted into cash.
The cash goes to your creditors in order of priority that is determined by the Bankruptcy Code in full satisfaction of your debts. The difference between what you owe and what you have paid your creditors in liquidation is usually discharged. Some debts, however, are not dischargeable.
Most of your basic living needs are exempt from this liquidation process, including a vehicle for purposes of commuting to work depending on the equity you have in the vehicle. One consideration is whether you have a home encumbered by a mortgage. Should you be behind on the mortgage, you could lose your home under Chapter 7 since your lender will unlikely let you “reaffirm” the debt.
If you have too much equity in your home, you may also be unable to keep your home because it may not be exempt. If you are current on your payments and you do not have too much equity in your home, then it may be possible to keep your residence in a Chapter 7 bankruptcy.