What type of bankruptcy is Chapter 7?

Chapter 7 bankruptcy is classified as liquidating bankruptcy, which means that it involves the selling (or liquidation) of a debtor's non-exempt assets to pay off creditors. The goal of Chapter 7 is to provide a fresh start for individuals or businesses that cannot pay their debts, allowing them to eliminate most unsecured debts after the liquidation process is complete.

In this process, a bankruptcy trustee is appointed to oversee the liquidation of assets and distribution of the proceeds to creditors. This makes Chapter 7 fundamentally different from reorganizing bankruptcy, where the debtor proposes a repayment plan to keep their assets and continue operations while paying off debts over time.

Additionally, while Chapter 7 can be consumer-centered—often utilized by individuals facing insurmountable debt—it encompasses a broader range of situations, including those involving businesses that need to liquidate their assets. The focus on liquidation and the finality of the debt discharge process is what distinctly classifies Chapter 7 as liquidating bankruptcy.