Chapter 7 bankruptcy is often called liquidation bankruptcy because you wipe out all (or most) of your debts and in return the bankruptcy trustee liquidates your property to pay your creditors. However, because the trustee cannot take exempt property (property that state or federal bankruptcy law decrees as protected), most Chapter 7 bankruptcy filers keep all or most of their property.
In 2005 Congress changed bankruptcy law so that not everyone qualifies for Chapter 7 bankruptcy. If you earn more than the median income in your state, you’ll have to take something called the “means test” to see if you are eligible for Chapter 7.
Even if you do qualify, Chapter 7 isn’t the best option for everyone. If you have lots of equity in your home, the trustee may sell it. And if you are behind in mortgage payments or your car loan note, Chapter 7 bankruptcy is not usually the best way to save your home or car.