Bankruptcy Fortress

Chapter 7 bankruptcy is also known as liquidation bankruptcy or straight bankruptcy.  It is a court process where debts are discharged (wiped out).  The discharged debts don't have to be paid.

In principle, the debtor might have to give up some property.  However, in practice, vast majority of people who consider bankruptcy easily fit within the limited protection of exemptions.  Those who seem to have more property than can be protected with exemptions can still usually keep everything in a chapter 7 after exemption planning. In California, a chapter 7 debtor can keep $75,000-$175,000 in home equity or $20,000-30,000 in other property (bank accounts, cars, stocks, etc.).  Retirement accounts are exempt.

The law of exemptions varies from state to state.  So the exempt property that a Chapter 7 debtor keeps could be modest or could be quite a fortune, depending on the state of residence.  In any case, when bankruptcy is properly planned, virtually all property is exempt and none of it goes to creditors.

Getting into the Chapter 7 Club

Because Chapter 7 results in a complete discharge, it is highly desirable. So it is limited to those who are not well-to-do.  In order to file a Chapter 7 case, the debtor must pass the means test.  Under this test, Chapter 7 is available to all below-median earners and even some above-median earners.

The "median" income in this test is the median income in the state of debtor's residence. The actual numbers for all states can be found here. The numbers for California are shown below.

Vast majority of people filing for Chapter 7 bankruptcy are low and middle income, have relatively few assets and relatively high debts, and so they pass the means test with flying colors.  But what's more, the means test is flexible, an even in cases, where the income is above the means test ceiling, it can be argued successfully that a chapter 7 case should be allowed.

"Chapter 7" refers to the chapter of the federal Bankruptcy Code, also known as Title 11 of the United States Code.