Chapter 7 Bankruptcy

Chapter 7 helps you start over after getting overwhelmed by debt.

Each year, hundreds of thousands of Americans — and some years, well over a million — file for Chapter 7 bankruptcy when they cannot afford to repay the debt they owe.

Click on the links below to learn about useful topics or continue reading for an overview of Chapter 7.

You can jump to the steps in the process you want to know about or keep scrolling to learn about the Chapter 7 bankruptcy process in order:

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy — also known as liquidation or straight bankruptcy — is a process in which you are able to ask a bankruptcy court to wipe out most of your debts so you can start over. A judge will review your case and accept or deny the request.

If approved, the court puts an "automatic temporary stay" in place that stops creditors from trying to collect payments or taking action such as wage garnishment, repossession, or foreclosure, while the bankruptcy case is pending.

Chapter 7 bankruptcy provides immediate relief to people in serious debt; however, there are some drawbacks as well.

Filing for bankruptcy protection negatively affects your credit score for many years, and you could lose certain nonexempt assets that are sold, or "liquidated," to repay your creditors. Most assets, though, are considered exempt and are not subject to liquidation.

The liquidation process generally involves three steps:

  1. Your nonexempt assets are sold (if you have any)
  2. Your creditors and lenders receive payment from the sold property
  3. You are freed from most remaining unsecured debts and can start over

Keep in mind your student loans, tax debt, and other types of secured debt are not "dischargeable," and you will still need to repay these unless you are able to show extraordinary circumstances. Most consumer debt, though, like medical bills and credit card debt, are dischargeable.

Qualifying for Chapter 7 Bankruptcy

Basics and Eligibility for Chapter 7

Chapter 7 bankruptcy focuses on liquidating your nonexempt assets, if you have any, to repay creditors before your remaining debt is discharged. The process can get rid of many types of unsecured debt such as credit card debt, medical bills, and utility bills.

Chapter 7 is the most common of the bankruptcy options available to individuals. Another bankruptcy option available to individuals is Chapter 13, which focuses on debt repayment. (More on the differences between the two below.) Chapter 12 bankruptcy is a relatively new option available to “family farmers" and “family fisherman."

To qualify for Chapter 7 bankruptcy you must meet specific eligibility requirements, including a "means test." The purpose of the test is to prevent high-income earners from qualifying for Chapter 7.

You pass the means test automatically if your average monthly income for the six months before filing for bankruptcy is less than or equal to your state's median income.

If your income is higher than your state's median income, you may still pass the means test if it's determined that you don't have enough disposable income to pay your creditors after taking into account your income, expenses, and family size.

Chapter 7 Compared to Chapter 13

People who do not pass the Chapter 7 means test have the option to file for Chapter 13 bankruptcy instead. Chapter 13 requires you to pay back debt over time using a repayment plan under which installment payments are made to creditors over three to five years.

You can decide that Chapter 7 is not right for you at any time. Changing to Chapter 11, 12, or 13 filing is allowed as long as:

  • You are eligible under the rules for those chapters
  • Your case was not already converted to Chapter 7 bankruptcy from one of the other chapters
  • You do not try to change the case repeatedly

Exceptions to the Means Test Requirement

Most but not all people who file for Chapter 7 bankruptcy protection must pass the means test in order to qualify.

The following filers may not have to pass the means test after completing the Statement of Exemption from Presumption of Abuse Under §707(b)(2) form:

  • Disabled veterans that file to eliminate debt incurred while on active military duty
  • Filers with debt that primarily came from operating a business
  • Members of the National Guard or military reservists who are called to active duty before filing

Other Eligibility Restrictions

The following circumstances could also make you ineligible for Chapter 7 bankruptcy:

  • You can repay some debt (you would likely file for Chapter 13 in this situation)
  • Some debt was previously discharged in bankruptcy (you cannot file again too soon after a previous bankruptcy)
  • Your previous bankruptcy case was dismissed within the last 180 days
  • You failed to go to credit counseling
  • You defrauded your creditors

The Process of Filing Chapter 7 Bankruptcy

Filing A Chapter 7 Petition

The Chapter 7 bankruptcy process truly begins when you file your documents and a petition with the bankruptcy court. This court serves the area where you live or where your business is organized (or has its principal place of business or principal assets).

A married couple can choose to file a joint petition together or to file as individuals.

In an emergency (such as to stop a foreclosure), you can file for bankruptcy without filing all of the necessary forms. However, you must file the remaining paperwork within 15 days.

You must attend credit counseling before you file. It is required to be:

  • With a credit counseling agency approved by the state
  • At least 180 days before filing for bankruptcy

This counseling agency will help you determine whether Chapter 7 is the best option for you.

Sometimes other alternatives, such as entering into a repayment plan with the creditor, will resolve financial problems. It's important to work with a local bankruptcy lawyer who can help you figure out of Chapter 7 is the best option for your situation.

Chapter 7 Filing Fees and Administrative Fees

When you file for Chapter 7 bankruptcy, the courts will charge you:

  • One case filing fee of $220
  • One miscellaneous administrative fee of $39
  • One trustee surcharge of $15

Typically, the total fee of $274 is paid to the clerk of the court when you file your paperwork. If you cannot pay this amount right away, you must:

  • Ask the court's permission to delay paying
  • Pay in four installments of $68.50
  • Complete all payments within 120 days after filing for bankruptcy
  • Ask the court for extra time (if needed) which will extend your time to 180 days after filing for bankruptcy.

If you and your spouse chose to file together, you only owe one set of these fees. If you don't pay these fees your case can be dismissed.

The court may waive the requirement that the fees be paid if:

  • Your combined income is less than 150% of the poverty level
  • You can't afford the fees even with an extension or four payments

Required Information to Submit When Filing Chapter 7

Filing for Chapter 7 requires information about income, debts, and property. You should be ready to submit:

  • A list of all credit cards and the amount you owe
  • Any child support or spousal support (alimony) you pay and/or owe
  • Most recent federal tax return (and any tax returns filed during the case)
  • Last year's tax return (you may need to submit from other past years but two years is most common)
  • Paycheck stubs for the past 60 days
  • A list of your assets, property, and any liabilities
  • Current monthly total income and expenses (be sure to list any predicted increase in income or expenses after filing such as a promotion or holiday expenses)
  • Your general financial affairs
  • Any current contracts or unexpired leases
  • Proof of your credit counseling class
  • Your debt repayment plan (this is usually developed through the credit counseling class)
  • A record of qualified federal or state education tuition accounts (QTP) or interest gained

Even If you decide to file together you both still need to submit all the documents above as if you were filing alone, such as both spouses submitting their income records.

Appointment of Bankruptcy Trustee

Once your case is filed you are appointed a bankruptcy trustee. They handle the paperwork, questions, and monitor your case from beginning to end.

Your trustee must, by law, make you aware of the possible bad outcomes that can happen. They should tell you that:

You will be told about these risks at or before the meeting of the creditors (see below). Ask questions if you do not understand one of the topics.

The "Automatic Stay"

Once you file your petition a legal process takes place called the "automatic stay." This is a legal term for "automatically stop."

An automatic stay will stop collection agencies from calling you about the debt. Some actions or steps in the process cannot be stopped, and the "stay" might only help you for the duration of your case. But, if the stay is currently in effect, the creditors can't sue you, take your income with wage garnishments, or call you about the debt.

The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by you in the filing documentation phase.

Meeting of Creditors in Chapter 7 Bankruptcy

After you file for bankruptcy, the bankruptcy trustee will schedule a meeting with creditors. Creditors and the trustee may ask you questions about bankruptcy documents and about other relevant information.

The trustee will hold the meeting 20 to 40 days after you file the paperwork. You will be expected to:

  • Attend the meeting (both spouses must attend if you filed together)
  • Be put "under oath" and answer everything honestly
  • Answer questions from the trustee and creditors
  • Cooperate with the trustee
  • Provide any financial records or documents that the trustee requests

In most cases, this is the only time you will appear in bankruptcy court (which is often a conference room at the courthouse, not a courtroom used for trials and hearings).

The bankruptcy judge will not be at the meeting so they can have "independent judgment" and not be swayed one way or the other after meeting you.

After The Meeting of Creditors

Within 10 days of this meeting, your bankruptcy trustee will report back to the court. They will determine if you qualify under the rules of the means test (which determines eligibility for filing bankruptcy under Chapter 7).

After Filing: Attend Personal Financial Management Counseling

Before receiving a bankruptcy discharge, you must attend a course about financial management with an agency approved by the U.S. Trustee's office. This is different from the credit counseling course you attended before filing.

You will receive a certificate to file with the bankruptcy court upon completion. This requirement is necessary for the fulfillment of bankruptcy.

What Happens to Your Property in Chapter 7?

Bankruptcy Exemptions: Property You Can Keep

Chapter 7 bankruptcy involves gathering certain property or assets, if you have them, and selling them to pay off as much debt as possible. This step, known as liquidation, must happen before the rest of your debt can be "discharged" or eliminated.

The good news is that state and federal bankruptcy law protects many kinds of property from being sold off to pay these debts. These protections are called "exemptions" and they include:

  • Your house
  • Your car
  • Certain personal property
  • Wildcard exemptions (a catch-all for a property that doesn't fit into a designated category)

Exemptions are determined at the state law level, or the list set out by federal law. Some states require you to use only the state's list. Be sure to check your state's laws to find out what applies to you.

Nonexempt Property Under Chapter 7

Most people who file for bankruptcy do not lose any assets in liquidation because so many types of property are considered exempt. However, some property cannot be protected from creditors during the bankruptcy process. This is known as nonexempt property.

Property that is nonexempt (and could be liquidated) may include:

  • Expensive musical instruments (unless you are a professional musician)
  • Collections of stamps, coins, and other valuable items
  • Family heirlooms
  • Cash, bank accounts, stocks, bonds, and other investments
  • A second car or truck
  • Vacation homes

Deciding Whether to Reaffirm, Redeem, or Surrender Secured Debt

Secured debts are debts secured by collateral, such as a car that serves as collateral on a car loan. These secured debts give a creditor the right to take the property if you do not pay the debt, even if the debt is discharged in your bankruptcy proceeding.

In bankruptcy, you can choose to do any of the following with property attached to secured debt:

  • Reaffirm: You can choose to keep the property by entering into a new agreement with the creditor to repay the debt
  • Redeem: You can choose to keep the property by paying the creditor the current value of the property
  • Surrender: You can choose to the property back to the creditor, which is the simplest option

Part of the bankruptcy paperwork you file details how you will handle your secured debt such as your home or auto loan.

The Final Chapter 7 Discharge

Typically, about two months after the meeting with creditors, you will receive a Notice of Discharge from the bankruptcy court.

After receiving this notice, you are no longer responsible for paying the debts discharged in bankruptcy. This is your financial restart!

Talk to an Attorney to Learn About Chapter 7

Getting the right help when you file for bankruptcy is crucial to its success. Creditors and other parties involved in a Chapter 7 bankruptcy are represented by lawyers, and you should be too.

Legal counsel can alert you to opportunities to protect your property and negotiate for the best terms. Get in touch with an experienced bankruptcy attorney who can answer any bankruptcy-related questions and help you get through your bankruptcy proceedings.