Filing a Chapter 7 Bankruptcy: Basic Steps

Filing for Chapter 7 bankruptcy is a big decision, but the process is predictable. If you would like to learn what to expect or how to file for Chapter 7 bankruptcy, this article is the right place to start.

Chapter 7 Bankruptcy Filing Process: The Steps

We've simplified the steps involved so this broad topic is more manageable. When you're ready to dive into the details, use the links provided—they'll take you to resources covering the topic in more depth.

1. Choose a Chapter: Is Chapter 7 Bankruptcy Best?

You're likely familiar with the two chapters available when filing for bankruptcy—Chapters 7 and 13. But not everyone knows when it's better to file Chapter 7 or 13.

Filing a Chapter 7 bankruptcy is more popular because it erases qualifying debts in about four months. Also, filers like it because there's no requirement to repay creditors.

By contrast, Chapter 13 bankruptcies are more involved. Chapter 13 filers pay all disposable income to creditors for three to five years, making Chapter 13 expensive and difficult to complete. Unsurprisingly, most filers would prefer not to file for Chapter 13 bankruptcy when possible.

So why would someone choose Chapter 13? People with significant incomes often don't qualify for Chapter 7 and are limited to using Chapter 13 for debt relief. But other reasons exist, too. For instance, Chapter 13 can help you keep a house, car, or other property you'd lose in Chapter 7.

2. Analyze Debt: Can You Erase Your Bills By Filing Bankruptcy?

Not all debts go away in Chapter 7. However, that's why you're considering filing for Chapter 7, so naturally, you need to know what you can eliminate or "discharge" in Chapter 7.

The funny thing about bankruptcy law is that it doesn't include a list of debts you can erase. Instead, it lists the debts you can't get rid of, or "nondischargeable" debts." The most common are child and spousal support obligations, student loan balances, and recently incurred tax debt.

You'll want to look at the detailed list in our bankruptcy discharge article. If you find all your debt will remain when Chapter 7 ends, you probably won't benefit from Chapter 7. However, chances are you can discharge many debts in Chapter 7 bankruptcy, including the following:

• credit card balances
• medical bills
• electric, gas, cable, and phone bills
• personal and payday loans
• apartment and car leases
• gym memberships and other dues, and
• mortgages, car loans, and other "secured debts," but you give up the property (learn when filers lose houses in Chapter 7).

Example. Lily's debts include medical bills, unpaid rent from her prior residence, and a past-due cellphone bill. She also maxed out her credit card a month before bankruptcy when she bought an expensive handbag. She can discharge all debt in Chapter 7, except for the handbag cost, if the creditor objects. Learn why you should avoid charging luxury purchases before bankruptcy.

Example. Reynaldo owed creditors $150,000 that he hoped to erase in Chapter 7—$100,000 to his ex-spouse, $25,000 in recent income taxes, and $25,000 in credit card debt. Reynaldo learned he could discharge the credit card debt in Chapter 7 but not the tax and marital property equalization balances. By contrast, in Chapter 13, Reynaldo would fully pay the $25,000 tax debt through the Chapter 13 plan. He could also erase most of the credit card and marital property equalization balances because both are dischargeable in Chapter 13.

The Chapter 13 result is possible because the ex-spouse was owed compensation for property division, which is dischargeable in Chapter 13 but not Chapter 7. Support obligations aren't dischargeable in Chapter 7 or 13.

3. Determine Exemptions: Can You Keep Your Property When Filing Chapter 7 Bankruptcy?

You'll review your state's exemption laws to determine whether you can keep all or most of your property in bankruptcy. When an exemption doesn't cover a valuable item, the Chapter 7 trustee will sell it and distribute the proceeds to creditors.

Each state has a unique set of bankruptcy exemptions. When a state lets a filer use the federal bankruptcy exemptions or the state set, you choose the exemption set that would work best for you. Although state exemptions vary widely, you can expect to keep the following:

• household furniture and appliances
• bedding and kitchenware
• clothing and prescribed medical devices
• some equipment needed for your business
• ERISA-qualified retirement accounts, and
• some equity in a car and home.

Example. Lynn planned to file for Chapter 7 and erase $50,000 in medical and credit card bills, but she learned she might lose property. Because she lived in a modest rental home with typical furnishings that wouldn't bring much at a yard sale, she worried only about losing her impressive collection of signed pickleball rackets. Lynn's concern was valid because collections are rarely protected. Lynn will want to check for a wildcard exemption available for use on any property. Otherwise, the trustee might let her buy the rackets at a discount.

Learn more about how bankruptcy exemptions work.

4. Check Eligibility: Is Your Income Low Enough to File for Bankruptcy?

Chapter 7 is the bankruptcy chapter intended to help lower-income filers who can't afford to repay some of their debts. You must take the Chapter 7 means test to determine if you qualify, However, you'll be exempt from the means test if most of your debt is from a business venture or you're a qualifying military member.

If you're not exempt, here's what you'll do:

• Add all gross income earned during the six months before filing.
• Divide the total by six for a monthly average.
• Multiply the monthly average by 12 for a yearly total.
• Compare the annual total to your state's median gross income for your family size (check the figures on the U.S. Trustee Program website).

You'll qualify if your gross income meets or is less than the median figure. If you don't pass, you'll have a second chance to deduct allowed expenses from your income and demonstrate you can't afford to pay your creditors.

However, if the calculations show you have enough income to repay a meaningful amount to creditors, you won't be eligible. Instead, you'll need to look to Chapter 13 for debt relief.

Example. Michael's gross income calculation exceeded the allowed amount to qualify for Chapter 7. However, he passed the second portion of the means test easily after deducting his hefty mortgage and car payments, child support arrearages, and past-due tax debt.

Other qualification requirements also exist. For instance, you might need to delay filing for bankruptcy to comply with the multiple bankruptcy filing waiting period rules.

5. Take a Credit Counseling Course

Individuals filing for Chapter 7 bankruptcy must complete a course before filing or, in highly unusual cases, shortly after. You can take the class online or by phone up to 180 days before filing for bankruptcy. Here's where you'll learn more about the prebankruptcy credit counseling requirement.

6. Fill Out and File the Chapter 7 Bankruptcy Forms

You'll tell the court about your property, debts, income, expenses, and more on Chapter 7 bankruptcy forms. When finished, you'll have disclosed everything about your present and past financial situation, including whether you want to keep your car, house, and other secured property or return it to the lender. You'll also disclose property transactions that occurred up to ten years before your case.

Your case starts after filing the completed bankruptcy forms (the "petition"). Because a bankruptcy filing can be up to 60 pages long, you can use the emergency filing procedure requiring fewer forms if you're short on time. You'll file the remaining forms within 14 days. Otherwise, the bankruptcy court will dismiss your case.

You'll also pay a filing fee. If you can't pay it, you can ask the court to split it into four payments or waive it. Your household income must be 150% of the federal poverty guidelines or less, and you can't have sufficient income to pay in installment payments. Learn more about bankruptcy filing fees and costs.

7. Submit Documents to the Chapter 7 Bankruptcy Trustee

You'll prove the accuracy of your bankruptcy petition information by providing the Chapter 7 trustee appointed to your case with financial documents. You can find out why the trustee will want bank statements, paycheck stubs, profit and loss statements, tax returns, and more by reading about the financial paperwork needed for proof in bankruptcy.

8. Meet With the Chapter 7 Bankruptcy Trustee

The trustee will check identification at the 341 meeting of creditors in Chapter 7 bankruptcy—although your attorney might do so if it's a virtual meeting—and ask questions about your financial affairs. Creditors can come to the meeting, but they rarely do.

9. File Needed Objections and Motions

Motions aren't needed in most cases. However, if you dispute a creditor's claim or want to eliminate liens in Chapter 7, you'll address these matters before the court closes your case. If you forget to handle a lien—which happens—the court will likely let you reopen the case later.

10. Complete a Debtor Education Course

Before receiving your discharge order wiping out your debt, you must finish the second "debtor education" course. If you don't submit your certificate on time, the court will dismiss your case without issuing a discharge. Fixing this problem can be expensive because you'll likely have to file a motion and pay another bankruptcy filing fee. Learn more about credit and debt counseling in bankruptcy.

That's It!

Expect to feel a weight lift from your shoulders after completing the steps involved with filing for Chapter 7 bankruptcy because the order discharging qualifying debts wipes them out in Chapter 7 bankruptcy. Creditors won't be able to bother you any longer.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure you find what you need. Below, you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.