A Chapter 7 Bankruptcy Overview

Most people prefer filing for Chapter 7 bankruptcy because Chapter 7 is quick, and filers can eliminate debts without repaying anything to creditors. If this sounds good to you, you'll want to learn about the basics of Chapter 7 bankruptcy, including:

• qualifying for Chapter 7 bankruptcy
• protecting property and eliminating debts
• preparing the Chapter 7 bankruptcy forms, and
• navigating the Chapter 7 process.

After learning the basics, try our 10-question bankruptcy quiz. It can help identify bankruptcy issues best handled by a bankruptcy lawyer.

Who Can File Chapter 7 Bankruptcy?

Chapter 7 bankruptcy works well for people without much income or valuable property. Higher-income earners and people who own a lot of property are often better suited for Chapter 13 bankruptcy.

That's not to say higher-income people won't qualify—it happens more often than you might think. But you'll need to have quite a few family members or a lot of allowable expenses for it to work. Keep reading to learn why.

Do I Qualify for Chapter 7 Bankruptcy?

Qualifying for Chapter 7 bankruptcy is a two-step process. If your gross family income is low enough, you'll automatically pass the Chapter 7 means test. If your gross income is higher than allowed, you'll subtract expenses from your income. If the remaining amount isn't enough to pay a reasonable amount to creditors and the trustee's fee, you'll qualify for Chapter 7.

But that isn't the only requirement. For instance, you can't use Chapter 7 bankruptcy if you received a previous bankruptcy discharge in the last six to eight years. The waiting period depends on whether the previous filing was a Chapter 7 or 13 bankruptcy. Also, where you file will depend on how long you've lived in the state.

Find out more about Chapter 7 bankruptcy eligibility requirements.

How Much Does Chapter 7 Bankruptcy Cost in Time and Money?

The Chapter 7 filing fees cost $338 (as of February 2022), but if you can't afford it, you can ask the court for four installment payments or to waive the filing fee altogether.

From a time perspective, you'll likely invest ten to twenty hours of your time for the following:

• consulting with a Chapter 7 bankruptcy attorney
• gathering financial papers and completing forms
• taking two bankruptcy courses, and
• attending the 341 meeting of creditors hearing.

You'll find more information about the steps involved in filing Chapter 7 bankruptcy here.

How Do I Start a Chapter 7 Bankruptcy Case?

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:

• debts and monthly living expenses
• income and earnings
• property you can keep or "exempt"
• nonexempt property the Chapter 7 trustee will sell for creditors, and
• gifts, sales, and other property transactions occurring up to ten years before filing.

Your state decides the property you can exempt. You'll likely be able to protect some equity in your home and car, clothing, household furnishings, a retirement account, and some tools needed in your trade or business. Find out more about protecting property with bankruptcy exemptions.

In addition to filing the bankruptcy forms, you must also 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."

You'll find step-by-step instructions for completing the bankruptcy forms in How to File for Chapter 7 Bankruptcy, by Attorney Cara O'Neill and Albin Renauer, J.D.

Will Creditors Continue to Bother Me After I File for Chapter 7 Bankruptcy?

Filing for Chapter 7 bankruptcy works well to stop collection efforts. The court issues an "automatic stay" order as soon as you file that prohibits most creditors from trying to collect 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 which lawsuit types Chapter 7 bankruptcy can't stop and learn why filers lose the automatic stay after repeatedly filing Chapter 7 bankruptcy cases.

What Does the Chapter 7 Bankruptcy Trustee Do?

The Chapter 7 bankruptcy trustee's primary duty is to see that your creditors are paid as much as possible of what you owe them. And the more assets the trustee recovers for creditors, the more the bankruptcy trustee gets paid.

Evaluate Your Property

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.

Recover Property for Creditors

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.

What Will Happen to My Property in Chapter 7?

When you file for Chapter 7 bankruptcy, you lose ownership of your property temporarily because it becomes part of the "bankruptcy estate." The Chapter 7 bankruptcy trustee handles the estate during the Chapter 7 case.

You Might Be Able to Keep All of Your Property

Most property owned by Chapter 7 debtors is either exempt or won't raise enough money for creditors to warrant the time and expense of selling it. As a result, many debtors don't lose property—but it happens regularly enough.

Check Whether You'll Lose Property Before Filing

Before filing, you'll want to know whether you can exempt your property. Your bankruptcy attorney can tell you with certainty if you're not sure. Next, determine whether filing for Chapter 7 will make sense by subtracting the value of the property you'd lose from the amount of debt you'll erase.

Be sure to consider any payments the Chapter 7 trustee will make toward your nondischargeable debt—debts you can't discharge in bankruptcy. You get the benefit of any property sold to pay nondischargeable tax debt, a domestic support obligation, or some other debt you'll remain responsible for after Chapter 7 bankruptcy because the payment will lower the balance.

What Will Happen to Nonexempt Property

If, after the 341 creditors meeting, the trustee determines that you have some nonexempt property that you can't protect, you might have to surrender it or provide the trustee with like property or its equivalent value in cash.

If the property isn't worth very much or is cumbersome for the trustee to sell, the trustee will "abandon" it. You'd get to keep it, even though it is nonexempt.

Keep in mind that bankruptcy exemptions vary by state. You can find out more in Bankruptcy Exemptions and Your Property.

Will I Lose My House or Car in Chapter 7?

If you've pledged property as collateral for a loan, such as a house or car, the loan will be a secured debt. If you're behind on your payments, the creditor can ask the court to lift the automatic stay and repossess or foreclose on the property. So you'd lose it in Chapter 7 bankruptcy.

However, if you are current on your payments, you can keep the property and make payments as before. But there's a catch. You must be able to protect the property equity with a bankruptcy exemption. Otherwise 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.

A debt will also be secured if a creditor recorded a lien against your property. In some cases, such as with a judgment lien, you can get rid of the lien in Chapter 7 bankruptcy. But not often.

Which Debts Can I Erase in Chapter 7 Bankruptcy?

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, but because they're secured property, you'd need to return the property.

The most common "nondischargeable" debts you'll remain responsible for paying include child and spousal support, alimony, recently incurred tax debt, and student loans.

What Can I Expect After I File for Chapter 7 Bankruptcy?

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 important 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.

Learn more about the Chapter 7 bankruptcy process.

The Creditors Meeting in Chapter 7 Bankruptcy

The Chapter 7 bankruptcy trustee runs the meeting and, after swearing you in, will ask you questions about your bankruptcy case. In most Chapter 7 bankruptcies, this is the only hearing required. Most creditors' meetings last less than ten minutes and they've been held virtually during the pandemic.

Learn what happens after the Chapter 7 bankruptcy 341 meeting of creditors.

The Chapter 7 Bankruptcy Discharge

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:

• debts that automatically survive bankruptcy, such as child support, most tax debts, and student loans, unless the court rules otherwise, and
• debts that the court has declared nondischargeable because the creditor objected (for example, debts incurred by your fraud or malicious acts).

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.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure 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.