Chapter 7 Bankruptcy Definition

What is Chapter 7 Bankruptcy?

Chapter 7 is a bankruptcy proceeding where the court appoints a trustee to liquidate the debtor's nonexempt property and other assets. Once the assets have been liquidated and the associated costs have been deducted, the proceeds are distributed to the creditors to pay off the debt.

REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.

Chapter 7 Bankruptcy Explained

Chapter 7 bankruptcy involves collecting all of a debtor’s assets, liquidating the assets into cash and distributing the cash to the creditors based on the loan balances and type of debt owed to each creditor. When the bankruptcy proceeding is complete, the debtor is released from their debt obligations covered by the bankruptcy.

A Chapter 7 bankruptcy may be voluntarily chosen by the debtor (e.g. – in the event of a financial catastrophe, when the borrower is unable to meet their debt obligations) or it can be triggered against the borrower’s will (triggered by the lenders if the borrower falls into default).

In a Chapter 7 bankruptcy, the court appoints a trustee to carry out the liquidation of collateral and disburse the liquidated proceeds. In order to receive any of the liquidated proceeds, the lender must file a proof of claim to the court.

There is no additional repayment after the liquidated assets are disbursed among the creditors.


  1. ^ “Chapter 7 – Bankruptcy Basics.”, Accessed 24 Mar. 2020.
  2. ^ Ruth, George E. Commercial Lending. 5th ed., Washington, D.C., American Bankers Association, 2004, pp. 305-06.

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