10 Pieces of Bankruptcy Information Everyone Should Know

Chapter 7 Bankruptcy Is Liquidation
Although Chapter 7 is all about liquidation, not everything you own must be sold to pay debts. Some assets are exempt. Kirby Hamilton/Getty Images

There are a total of six different types of bankruptcy in the United States: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15. Chapters 9, 12 and 15 filings are very rare, restricted respectively to municipalities, farmers and Americans who owe debts both in the U.S. and abroad. The other three — 7, 11, and 13 — get most of the action.

Chapter 7 bankruptcy is all about liquidation. In a Chapter 7 case, the bankruptcy trustee calculates the total value of the individual or business's assets and liquidates just about everything — sells it, in other words — for cash. That cash is then used to pay off creditors. Any remaining debts are discharged immediately. Case closed.

Most individuals and businesses who file for bankruptcy choose Chapter 7 bankruptcy. Roughly 670,000 of the 1 million bankruptcies filed by both groups together from June 2013 to June 2014 were Chapter 7 cases [source: U.S. Courts].

The bankruptcy trustee is not allowed to liquidate absolutely everything in a Chapter 7 case. Each state has its own laws about exempt and nonexempt assets. In most cases, people can keep their home or at least a significant portion of the equity in their home; retirement savings; insurance policies; personal property like furniture, clothing and jewelry; a car; and any public benefits like Social Security or unemployment benefits [source: Nolo].

Because of all of these exemptions, the majority of Chapter 7 cases involving people are "no asset" bankruptcies [source: U.S. Courts]. Essentially, there's nothing for the trustee to sell, so all debts are simply discharged.