A Chapter 7 bankruptcy allows you to discharge most unsecured debts – credit cards, personal loan, lines of credit, medical bills, collections, personal guarantees on business debts, liability for pending lawsuits (breaches of contract), and most IRS & Franchise Tax Board debts (if they are at least 3 years old).
A “discharge” is an order from the Bankruptcy Court saying you are no longer liable on these debts. If creditors seek to collect on a discharged debt, they can be sanctioned. A Chapter 7 case does not discharge secured debts/liens (e.g., your car loan, your mortgage, etc.). You must continue making these payments or the lenders can foreclose/repossess. It also does not discharge student loans, debts due to fraud, recent IRS and Franchise Tax Board debts, domestic support payments, divisions of property in a divorce, or corporate debts.
In exchange for the discharge, you pledge all non-exempt assets to a Chapter 7 trustee who will sell them to pay down your debts. Most people’s largest asset in their primary residence. In California, the maximum you can exempt is $700,000. Any equity over that must be paid to the Chapter 7 trustee or the property can be sold by the trustee without your consent. Any other real estate anywhere in the world (rental, vacation, property held with others) is not exempt, i.e., you must pay the equity (up to the amount of your debts) or the trustee will sell your property.
A Chapter 7 will stop all collection efforts against you and your property. This is called the “automatic stay.” If creditors violate the automatic stay, they can be sanctioned.
If you make over a certain amount of money, you do not qualify for Chapter 7. (Unless the majority of your debts are non-consumer debts like business debts or taxes.) This determination is based on your income for the last six months and a formula based on IRS standards. A Chapter 7 typically completes in less than six months (from start to finish) and you will most likely never see a judge or be in court.
A Chapter 7 will remain on your credit report for 10 years. This is not a death sentence for obtaining credit, and it is possible to obtain a score of 700 or higher after a year if you start slowly (e.g., a secured credit card, lower limit cards) and use your credit responsibly. You will be less of a risk to lenders since most of your debts will be discharged. The primary factor for obtaining credit will likely be your income.