When a person falls into more debt than they can handle, one option is to file for bankruptcy. Most consumers who fall into debt file for Chapter 7 bankruptcy. Chapter 7 is used when a debtor makes less than the average person and can barely afford their necessary expenses.
Chapter 7 is considered liquidation. It is referred to as liquidation because the bankruptcy courts will look at of the Debtor’s property, including cars, houses, collectibles, insurance policies and retirement plans, etc. After determining what property can be saved (or exempted), the bankruptcy court and the trustee will sell the unexempted property. Whatever profits are gained from the sale will be distributed in equal percentages to the creditors.
Any remaining unpaid debt will be discharged. The creditors can no longer go after the debtor even if the debtor subsequently makes more money.