The potential filer for Chapter 7 bankruptcy should understand that in such a bankruptcy there is not plan of repayment on the part of the debtor, like there is in a Chapter 13 bankruptcy. What occurs in a Chapter 7 is the creation of what is known as the “bankruptcy estate.” Under 11 U.S.C. § 541 the bankruptcy estate is comprised of all the debtor’s legal and equitable interests. The estate essentially becomes the temporary legal owner of all of the debtor’s property. The estate is then managed by the bankruptcy trustee who is appointed to the debtor’s case through the Office of the United States Trustee.
The Chapter 7 Trustee will gather all of the debtor’s assets, except for those exempt under either federal or state law, depending on which exemptions the debtor chooses to elect, and will determine the priorities of the debtor’s creditors under the Bankruptcy Code. When priority has been established the Trustee will liquidate the assets of the bankruptcy estate in order to satisfy the debtor’s creditors. Creditors that hold liens or mortgages on the debtor’s property are considered to be “secured creditor” and will receive a distribution of the proceeds of their collateral before any other claimants, provided the collateral is liquidated in the bankruptcy process. Creditors without security interests are considered “unsecured creditors” and share in the unsecured property of the estate. These creditors are paid last and will receive what is left over from the unencumbered property. What all of this means is that a debtor may lose property if electing to proceed with a Chapter 7 bankruptcy. What is not exempt, will go to the bankruptcy estate and be sold in order to pay off the creditors. However when the trustee has exhausted the assets of the estate and the debtor receives their discharge they will no longer be indebted to their creditors. The process may cost the debtor some of their property but in return the debtor will be rewarded by taking their first steps to a fresh start.