Chapter 7 of the Bankruptcy Code provides for liquidation—the sale of the debtor’s nonexempt property and the distribution of the proceeds to creditors. A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13.

Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors.

In addition, the Bankruptcy Code will allow the debtor to keep certain "exempt" property; but a trustee will liquidate the debtor's remaining assets. Accordingly, potential debtors should realize that the filing of a petition under chapter 7 may result in the loss of property.

In California, Chapter 7 of the Bankruptcy Code is designed for debtors in financial difficulty who do not have the ability to pay their existing debts. Under Chapter 7 bankruptcy, a trustee is appointed to liquidate the debtor's nonexempt assets, which means selling these assets to generate funds to repay creditors. The process does not require the filing of a repayment plan as in Chapter 13 bankruptcy. Instead, the focus is on direct liquidation. California has its own set of exemptions that may differ from federal bankruptcy exemptions, which determine what property a debtor can keep as 'exempt' from liquidation. These exemptions are crucial as they allow debtors to retain certain essential assets, like a primary residence up to a certain value, a vehicle, household goods, and retirement accounts, among others. However, assets that are not exempt can be sold by the trustee to pay creditors. Debtors considering Chapter 7 should be aware that it can lead to the loss of property, but it also provides a fresh start by discharging most debts that cannot be paid through the liquidation process.