Chapter 7 is known as “straight” bankruptcy or “liquidation.” It requires an individual to give up property which is not exempt under the law, so the property can be sold to pay creditors. Generally, those who file chapter 7 keep all of their property except property which is very valuable or which is subject to a lien which they can not avoid or afford to pay. In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts.
The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for exempt property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. If you want to keep property like a home or a car and are behind on the mortgage or car loan payments, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.
If your income is above the median family income in Arizona, you will have to complete a means test to see if you qualify for a chapter 7 bankruptcy. (For Arizona cases filed after February 1, 2008, the median income for a single wage earner is $40,945; for a family of two, it is $53,153; for three, $59,782; and for four, $66,903. Add $6,900 for each individual in excess of 4). Based on the means test results, the bankruptcy court may decide that you have to file a chapter 13 case.