In a Chapter 7 bankruptcy (also known as a “straight discharge”), the primary goal is to liquidate non-exempt property to pay creditors. The debtor then receives a discharge of the debts allowed under the law. This typically includes credit card bills and other unsecured debt, such as medical bills, lines of credit, and personal loans. For secured debt, such as mortgages or car loans, the debtor has the option of whether to surrender the property in exchange for a discharge, or to reaffirm the debt.
In a Chapter 7 bankruptcy, the debtor is allowed to keep certain exempt property. The level of the exemption is set by statute, and can vary based upon factors such as residency. Non-exempt assets are sold (liquidated) by the trustee to repay creditors. Many types of unsecured debt are legally discharged by the bankruptcy proceeding, but there are some types of debt that are not discharged in a Chapter 7.
Common exceptions to discharge include child support, income taxes less than 3 years old and property taxes, student loans (unless the debtor prevails in a difficult-to-win adversary proceeding brought to determine the dischargeability of the student loan), and fines and restitution imposed by a court for any crimes committed by the debtor. Spousal support is not covered by a bankruptcy filing nor are property settlements through divorce.