For most people considering filing for bankruptcy, Chapter 7 is the preferred choice. Why? Because of all types of bankruptcy, Chapter 7 is the quickest and the cheapest, allowing filers to eliminate debts without repaying anything to creditors.
If this sounds good, you'll want to learn the basics of filing bankruptcy in Chapter 7, including navigating the Chapter 7 process. You'll learn how to file for bankruptcy, Chapter 7 bankruptcy requirements, how much it costs to file for Chapter 7 bankruptcy, Chapter 7 bankruptcy income limits, when to file for bankruptcy, and more.
Many people can't get ahead financially because of unpaid credit card balances, medical bills, rent and utility payments, gym memberships and other fees, and payday loans. If this sounds familiar, filing for Chapter 7 bankruptcy could improve your life quickly.
Chapter 7 bankruptcy requirements include filing forms, attending a hearing, and participating in two relatively short courses. After completing these steps, you'll wipe out the types of debts described above and other bills. And many people keep everything they own.
You can use Chapter 7 bankruptcy to erase or "discharge" debt without paying into a lengthy payment plan. The other bankruptcy option, Chapter 13, lasts three or five years. You must pay all your extra or "discretionary" income to creditors each month, which isn't easy.
However, the Chapter 13 repayment plan allows filers to catch up on overdue mortgages and auto loans and keep the house or car. Sometimes, you can reduce the amount owed on home and auto loans and other secured debts and pay the balance over time. Those options aren't available in Chapter 7.
Find out more about the differences between Chapter 7 vs. 13.
The Chapter 7 filing fees cost $338 (as of October 2023), but if you can't afford it, you can ask the court for four installment payments or to waive the filing fee altogether. Hiring a bankruptcy lawyer to represent you is relatively reasonable compared to the debt savings. You can expect to pay $2,000 for a Chapter 7 case; however, bankruptcy costs vary depending on your location and case difficulty.
From a time perspective, you'll likely invest ten to twenty hours of your time for the following:
Overall, most Chapter 7 cases take about four months to complete.
Chapter 7 bankruptcy works well for people with little income or valuable property. Higher-income earners and people who want to keep property they'd otherwise lose in Chapter 7 are often better suited for Chapter 13 bankruptcy.
That's not to say higher-income people won't qualify for Chapter 7. It happens more often than you might think. But you'll need several family members or significant allowable expenses to work. Keep reading to learn why (you'll find the answer in the "means test" sections).
Individuals and businesses can file Chapter 7, but not everyone qualifies for a Chapter 7 debt discharge. If you don't qualify for a discharge, the Chapter 7 trustee appointed to your case will sell your property and distribute the funds to your creditors. You'll remain responsible for your debt after the case ends.
Learn more about who might not want to file for Chapter 7 bankruptcy.
Chapter 7 bankruptcy doesn't have a particular set of income limits that applies to everyone filing for bankruptcy. Instead, you'll take the means test.
If you pass the Chapter 7 means test, you'll qualify, although you must also meet other requirements (discussed below). But you might not be required to take the means test if you fall into an exempt category.
The means test determines whether you make enough money to repay your creditors through a Chapter 13 plan. If you don't, you'll qualify to discharge debts using Chapter 7.
You'll follow the means test form instructions to determine your family's gross income and compare it to your state's median income for a family of the same size. You'll automatically pass if it doesn't exceed the state's median.
If your gross income is too high, the second part of the means test asks you to subtract allowed expenses from your income. If you don't have enough to pay a reasonable amount to creditors after completing the calculations, you'll qualify for Chapter 7.
Are you a military member? You'll be exempt if your service falls within the guidelines listed on the means test form. Are you a current or previous business owner? You'll be exempt if you have more business debts than consumer debts.
You incur business debts as a result of pursuing profit-producing endeavors. Household rent, utility bills, food, and family entertainment expenses would be consumer debts. Learn about small businesses in bankruptcy.
There are many. Because the means test looks at previous earnings, not current earnings, the trustee will check your current wages and expenses. If you have money remaining each month, you might need to consider Chapter 13.
You also won't qualify for a discharge if you received a previous bankruptcy discharge in the last six to eight years. The waiting period depends on whether you previously filed a Chapter 7 or 13 bankruptcy.
Also, where and when you file will depend on how long you've lived in the state. You'll need to be in the state for at least 180 days. The wait will be longer if you'd like to use the new state's exemption laws (more about how exemption laws protect property below).
When you file for Chapter 7 bankruptcy, you temporarily lose property ownership. It becomes part of the "bankruptcy estate" the Chapter 7 trustee handles.
You'll start by listing all property in your bankruptcy forms. You'll also identify what you can protect or exempt by listing the state or federal bankruptcy exemption code number.
Filers can keep some equity in most types of essential property, such as the following:
Your state decides which items you can protect or whether you can use the federal exemptions instead. You'd use whichever exemption system allows you to keep the property most important to you.
Remember that bankruptcy exemptions vary by state. Find out more about protecting property with bankruptcy exemptions or talk to your bankruptcy attorney if you need more clarification about what you can keep.
Losing property in Chapter 7 happens regularly enough that you should carefully check exemptions. For instance, most filers won't be able to keep their boats, RVs, expensive jewelry, antiques, and other luxury items.
If you have nonexempt property you can't protect, you might have to surrender or pay to keep it (most trustees will sell things back to you at a discount). The trustee will sell it at auction, return the exemption amount to you, deduct the sales costs and the trustee's fee, and disperse the remaining amount to unsecured creditors.
However, if selling the property wouldn't generate much for creditors, the trustee will "abandon" it. You'd get to keep it, even though it's nonexempt.
Tip. Determining whether Chapter 7 makes sense can be done by subtracting the value of the property you'd lose from the debt you'd erase. If the amount of debt you'd wipe out significantly exceeds the amount of property you'd lose, filing for bankruptcy will likely be a sound financial decision.
Your first step will be checking whether you can protect all of your home or car's equity with a bankruptcy exemption. If you can't, you'll likely lose it in Chapter 7. The Chapter 7 bankruptcy trustee will sell the house or car, return the exemption amount to you, and distribute the remaining sales proceeds to creditors.
Suppose you can protect the equity with a homestead, motor vehicle, or wildcard exemption. If you financed your home or car and are still making payments, you must meet another requirement. You must also be current on the monthly payment.
If you aren't current, the lender can ask the court to lift the automatic stay and repossess or foreclose the property. If successful, you'd lose it in Chapter 7 bankruptcy. This result occurs because when you purchased the property, you agreed it would be collateral for a loan, making it a secured debt. If you're behind on your payments, the creditor can recover the property, even if you've filed for bankruptcy.
Your debt will also be secured if a creditor records a lien against your property, such as a tax or judgment lien. In some cases, such as with a judgment lien, you can eliminate the lien in Chapter 7 bankruptcy. But only sometimes and not always entirely.
Most filers will find they can eliminate credit card balances, medical bills, personal loans, utility payments, past-due rent, and more. It's even possible to discharge mortgage and car payments. However, you'd need to return the property because they're secured property. As explained above, the lender can recover the property if the debt goes unpaid, even if you file for bankruptcy.
The most common "nondischargeable" debts you'll remain responsible for paying include child and spousal support, alimony, recently incurred tax debt, and student loans.
The entire Chapter 7 process is essentially a qualification process, and the person to best predict the outcome of your case would be a bankruptcy lawyer experienced with diverse issues.
For instance, suppose your income and debt ratio appear unbalanced (people who inflate income when applying for credit will want to avoid bankruptcy). In that case, you might want to explore other debt repayment options. After assessing your particular finances and financial history, an experienced bankruptcy lawyer will be in the best position to identify potential problems and explain your chances of success.
Learn about the transaction types that could be considered bankruptcy fraud.
You won't want to use your credit cards for anything other than food, clothing, and other necessary items to prevent allegations of fraudulent credit card use. Learning about luxury purchases, cash advances, and the "presumption of fraud" can help avoid trouble.
You'll also want to avoid giving away, hiding, or selling property for less than its value. It's essential to be transparent about your finances when filing for bankruptcy.
These are a few of the many tips for a problem-free bankruptcy. Learn more about what you should avoid before bankruptcy.
Your Chapter 7 bankruptcy will start when you file your Chapter 7 bankruptcy petition, schedules, and other forms with your local bankruptcy court. The bankruptcy forms reveal your complete financial condition and include disclosures about the following:
In addition to filing the bankruptcy forms, you must complete credit counseling with an agency approved by the United States Trustee. You'll find approved agencies for each state on the U.S. Trustee's website. Click "Credit Counseling and Debtor Education."
A week or two after filing, you and your creditors will receive a notice with the date and time of the Chapter 7 hearing all filers must attend, the "creditors meeting" or "341 meeting of creditors." You'll also learn the name of the Chapter 7 trustee appointed to your case and essential Chapter 7 filing deadlines.
Five days before the meeting, you'll turn over your "521 documents." Plan to provide bank statements, paycheck stubs, tax returns, and other financial documents the trustee requires. Filers with a business ownership interest will also turn over profit and loss statements.
Filing for Chapter 7 bankruptcy works well to stop collection efforts. The court issues an "automatic stay" order as soon as you file, prohibiting most creditors from collecting what you owe them.
At least temporarily, creditors cannot legally seize or "garnish" wages, empty or "levy" your bank account, go after your car, house, or other property, or cut off your utility service when you file for bankruptcy. Chapter 7 will even stop some lawsuits.
However, the automatic stay has limits. Find out why filers lose the automatic stay after repeatedly filing Chapter 7 bankruptcy cases.
The Chapter 7 bankruptcy trustee's primary duty is seeing that your creditors are paid as much as possible. Because the trustee receives a percentage of the money distributed to creditors, the more assets the trustee recovers, the more the bankruptcy trustee gets paid.
The trustee will review the property listed in your Chapter 7 bankruptcy paperwork and determine whether a bankruptcy exemption gives you the right to keep it. If not, the trustee will sell it. The trustee will also evaluate property transfers and sales, look for hidden property, and review income sources and claimed expenses.
The trustee can use a "clawback" provision to unwind preferential payments to creditors before the Chapter 7 filing and distribute the funds according to bankruptcy law. In most Chapter 7 bankruptcy cases, the trustee doesn't unwind any transactions and finds nothing of value to sell. But that's not always the case, and most filers who run into problems aren't truly surprised that the issue emerged.
After swearing you in, the Chapter 7 bankruptcy trustee runs the meeting and will ask questions about your bankruptcy case. In most Chapter 7 bankruptcies, this is the only hearing required. Most creditors' meetings last less than ten minutes.
Learn what happens after the Chapter 7 bankruptcy 341 meeting of creditors.
Assuming you complete everything required of you, you'll wait about four months to receive your Chapter 7 debt "discharge" which will wipe out everything except the following:
The court will likely close your case a few days later.
The process rarely takes longer than four months unless the court keeps your case open to resolve bankruptcy litigation or when the Chapter 7 trustee needs time to sell nonexempt property. Find out more about when your Chapter 7 bankruptcy will end.
Yes. You can expect your credit score to drop after you file. However, it's often easier to rebuild credit after bankruptcy. You'll likely receive offers for credit cards soon after your case ends. With careful use and management, most people can finance a car a year later and buy a home two to four years after bankruptcy.
Other issues to prepare for include opening bank accounts and renting a place to live for a year or more after filing. You'll want to secure these things before filing for bankruptcy.
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!
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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.
Updated October 11, 2023