A Chapter 7 Bankruptcy Overview

Learn the basics about Chapter 7, how it works and what it can do.

Chapter 7 bankruptcy is the type of bankruptcy most people prefer to file because it's quick and filers aren't required to pay back any debt. In this article, you'll learn about the basics of Chapter 7 bankruptcy, including who can file, the forms you'll need, how the process works, and what happens to your property and debts.

Who Can File Chapter 7 Bankruptcy

Not everyone qualifies for a Chapter 7 discharge. You'll qualify if your gross income is lower than your state's median income. If it's higher, you'll still qualify if, after paying allowed monthly debts, you don't have enough left over to feasibly complete a Chapter 13 repayment plan.

Other requirements exist, too. For instance, you won't be able to use Chapter 7 bankruptcy if you already received a bankruptcy discharge in the last six to eight years (depending on which type of bankruptcy you filed). And where you can file will depend on how long you've lived in the state.

Learn more about the Chapter 7 eligibility requirements.

Chapter 7 Bankruptcy Costs in Time and Money

The Chapter 7 bankruptcy process takes about four to six months. The filing fees cost $338 (as of December 2020), and it usually requires only one trip to the courthouse.

Bankruptcy Forms

Your bankruptcy begins after you file a petition and other forms with the bankruptcy court in your area. On the forms, you'll include information about:

  • your property
  • your current income and monthly living expenses
  • your debts
  • property you claim the law allows you to keep through the Chapter 7 bankruptcy process (called "exempt property") -- most states let you keep some equity in your home, clothing, household furnishings, Social Security payments you haven't spent, and other necessities such as a car and the tools of your trade
  • property you owned and money you spent during the previous two years, and
  • property you sold or gave away during the previous two years.

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.

Stopping Creditors with Bankruptcy's Automatic Stay

Filing for Chapter 7 bankruptcy puts into effect something called the "automatic stay." The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab ("garnish") your wages, empty your bank account, go after your car, house, or other property, or cut off your utility service.

Learn more about bankruptcy's automatic stay.

Bankruptcy Court's Control Over Your Financial Affairs

By filing for Chapter 7 bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy court. You can't sell or give away any of the property you own when you file or pay off your pre-filing debts without the court's consent. However, with a few exceptions, you can do what you wish with the property you acquire and the income you earn after filing for bankruptcy.

The Bankruptcy Trustee for Chapter 7 Bankruptcy

The court exercises its control through a court-appointed person called a "bankruptcy trustee." The 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 trustee is paid.

The trustee (or the trustee's staff) will examine your papers to make sure they are complete and look for nonexempt property to sell for creditors' benefit. The trustee will also determine whether any financial transactions occurring the year before you filed can be undone to free up assets for creditors. In most Chapter 7 bankruptcy cases, the trustee finds nothing of value to sell.

The Creditors Meeting

A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a "creditors meeting" has been scheduled. The bankruptcy trustee runs the meeting and, after swearing you in, will ask you questions about your bankruptcy and the papers you filed. In the vast majority of Chapter 7 bankruptcies, this is the debtor's only visit to the courthouse. Most creditors' meetings last less than ten minutes.

Learn more about the role of the Chapter 7 bankruptcy trustee.

What Happens to Your Property

Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, most debtors don't lose property--but it can happen. So it's a good idea to learn about the property types that tend to be exempt.

If, after the 341 creditors meeting, the trustee determines that you have some nonexempt property (property you can't protect), you might be required to either surrender the property 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.

What Happens to Secured Debts in Chapter 7

If you've pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and automobiles. If you're behind on your payments, the creditor can ask to have the automatic stay lifted to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before -- unless you have enough equity in the property to justify its sale by the trustee.

If a creditor has recorded a lien against your property because of a debt you haven't paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in Chapter 7 bankruptcy. Get in-depth information on how your secured debts are handled by reading What Happens to Your Debt & Property in Chapter 7 Bankruptcy?

The Chapter 7 Bankruptcy Discharge

At the end of the bankruptcy process, all of your debts are wiped out (discharged) by the court, 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).

Find out more about what you can wipe out with the bankruptcy discharge.

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