Chapter 7 bankruptcy allows eligible debtors to discharge their debt in three to four months. This type of bankruptcy is limited to people without the ability to repay their debts. Ability to repay creditors is determined using a form called the Means Test.
The first part of the Means Test calculates income using the average income for the last six months. If the debtor has below-median income based upon where they live and their household size, they automatically qualify for relief under Chapter 7 of The Bankruptcy Code. Debtors with above-median income must calculate their disoposable income by adding up allowed deductions and subtracting the total deductions from their income. If disposable income on the Means Test is below a certain amount they will qualify for Chapter 7 bankruptcy.
Chapter 7 bankruptcy is sometimes referred to as a "liquidation case." Debtors list all of their assets and then apply exemptions to protect their assets. Exemptions are laws that protect property from creditors. If the debtor has assets that cannot be protected by exemptions then the trustee may seize the assets, sell them, and pay the proceeds to the creditors listed in the case. The exemptions available to a debtor vary greatly depending on the state in which the case is filed. In Texas, for example, debtors are able to use either Federal or Texas state exemptions. The exemptions in Texas are very good and as a result most debtors receive a discharge without losing any of their property.
The Chapter 7 bankruptcy process usually lasts three to four months. At the end of the case the debtor receives an order discharging their debt. The discharge order has the effect of permanently preventing creditors from collecting dischargeable debt listed in the bankruptcy petition.