Chapter 7 Bankruptcy

by Albin Renauer, J.D.

A summary of what's involved in a typical Chapter 7 bankrupcty.

1. Analyze your debt.
Some debts, such as child support obligations, are not dischargeable in Chapter 7 bankruptcy. And if you pledged collateral for a debt, the creditor can take the property if the debt isn't paid. Find out more in When Chapter 7 Isn't the Right Choice.

2. Determine your property exemptions.
Every state has exemption laws, which dictate what types of property (or, in some cases, how much equity in particular types of property) you are entitled to keep if you file for Chapter 7 bankruptcy. You can find the exemption laws for all 50 states in The New Bankruptcy: Will It Work for You?, by attorney Stephen Elias (Nolo).

3. Make sure you are eligible.
If your average income during the six months before you file is more than the median income for a family of your size in your state, you may not be allowed to use Chapter 7, depending on your income and debts. For more information, see Who Can File for Chapter 7 Bankruptcy?

4. Redeem or reaffirm secured debts.
If you pledged property as collateral for a loan, you'll need to pay something to the creditor if you want the right to keep the property. When you file for bankruptcy, you'll be asked to decide whether you want to "redeem" the property (pay the creditor the current replacement value of the property), "reaffirm" the debt (agree on new contract terms with the creditor), or "surrender" the property (let the creditor take it -- if the property is worthless, the creditor may not bother). Depending on where you live, there may be other options as well.

5. Fill out the bankruptcy forms.
You complete a few dozen pages of forms, in which you tell the court about all of your property, debts, income, and expenses. You'll list the names of all your creditors, note which debts are disputed, decide what property you are claiming as exempt, and decide what you want to do about each of your secured debts.