Chapter 7 is sometimes called "straight bankruptcy" (we aren't sure how this came to be). Chapter 7 bankrutcy does not involve a repayment plan like Chapter 13 debt consolidation. Chapter 7 allows debtors to "discharge" or eliminate most debts. Generally, Chapter 7 is most beneficial in discharging and eliminating "unsecured" debt such as credit card debt, medical bills, or deficiency balances as a result of auto repossession. Chapter 7 eliminates debt in order to give the "honest but unfortunate" debtor a "fresh start".
"Secured" and "Unsecured" Debts
Chapter 7 works well for discharging unsecured debts that consumers are unable to repay. Examples of unsecured debts include credit card debts and hospital bills. Whereas "secured creditors" have specific identifiable collateral pledged as "securtity" for the repayment of the debt, "unsecured creditors" do not. Secured debts include home mortgages and auto loans.
Secured Debts and Chapter 7
Most consumers have a house payment and/or a car payment ("secured" debts) in addition to "unsecured debts" such as credit card and medical bills. Many prospective clients state that "I don't want to file on my house and car, just the credit cards and hospital bills". You do not file "on this" or "on that". When you file Chapter 7 you must list every creditor that you owe any money to. If you want to keep your home and car when you file Chapter 7, these lenders will gladly let you "reaffirm" your home and auto loans as long as you are current with their payments. After you "reaffirm" these debts, you must continue to pay your regular monthly payments on these loans. Sorry...contrary to popular belief you can't keep your house or car without paying for them. You can, however, discharge your unsecured debts and reaffirm secured debts. You can also discharge a secured debt by surrendering the collateral. For example, if you own a lemon car that won't run, you can surrender the car and discharge the debt.