Chapter 7 Bankruptcy: What It is & How It Works

What Is Chapter 7 Bankruptcy? 

Chapter 7 bankruptcy is a legal process that can help individuals overwhelmed by debt start fresh. It involves selling—also known as liquidating—some assets to pay off debts like credit card balances and medical bills. Some debts, such as student loans and alimony, are not dischargeable through Chapter 7 bankruptcy. The process is overseen by a bankruptcy trustee who ensures that everything follows legal standards. 

Chapter 7 bankruptcy is a “last resort” financially, and there are several options that should be explored first, such as debt management plans or debt consolidation. That said, bankruptcy could be a good option to explore if:  

• Your unsecured debts add up to more than half your annual income. 

• With your current income, you have little chance of paying off your debts within five years. 

• Your debts cause you extreme stress and are negatively affecting your quality of life. 

• You have little or no disposable income, regardless of extreme budgeting. 

• You earn less than the median income level in your state. 

If any of these points apply to you, it’s crucial to seek help. A credit counselor will be able to advise you on the best steps to take for your situation. 

Who Qualifies for Chapter 7 Bankruptcy? 

Qualifying for Chapter 7 bankruptcy is not a simple process. To qualify, you’ll need to:  

• Take a means test, which compares your income to state median levels 

• Provide proof of financial hardship and honesty 

• Complete a credit counseling course no more than 180 days before filing 

• Have not filed for Chapter 7 bankruptcy within the previous eight years 

• Have not filed for Chapter 13 bankruptcy within the previous six years 

• Wait at least 181 days after having a bankruptcy case dismissed before trying again 

A credit counselor or bankruptcy attorney will be able to advise you on the likelihood of you qualifying for Chapter 7 bankruptcy and how to navigate the process.  

How Does Chapter 7 Bankruptcy Work? 

When an individual decides that Chapter 7 bankruptcy is the right route to take, they first file a petition with the bankruptcy court for their area and give detailed information about their financial affairs and assets. This information includes: 

• A full list of creditors and the amounts owed 

• Full details of income and expenditure 

• A complete list of property and assets owned 

• Proof of credit counseling within the previous six months 

If the person applying for bankruptcy is married, they must give this information for their spouse too so the complete household's position can be assessed. 

Once the paperwork has been submitted and approved by the court, a trustee is appointed to manage the sale of nonexempt assets, and a meeting is held with creditors. The debtor then completes a debtor education course, after which all eligible debts are discharged. 

What Debt Can Be Erased in Chapter 7 Bankruptcy? 

Chapter 7 bankruptcy can erase many kinds of debts, including: 

• Credit card charges 

• Unpaid rent and utility bills 

• Personal and payday loans  

• Debt collection agency accounts 

• Repossession deficiency balances 

• Tax debts over three years old 

With some types of debt, whether they can be cleared by Chapter 7 bankruptcy depends on timing and financial considerations. A credit counselor or your attorney will be able to give you advice tailored to your situation. 

What Debt Can’t Be Erased in Chapter 7 Bankruptcy? 

Some types of debt cannot be erased with Chapter 7 bankruptcy. These include: 

• Student loans 

• Child support 

• Alimony 

• Secured debts where you keep the assets 

• Tax debts less than three years old 

What Debt Can Be Erased in Chapter 7 Bankruptcy?	What Debt Can’t Be Erased in Chapter 7 Bankruptcy?
Credit card charges	Student loans
Unpaid rent and utility bills	Child support
Personal and payday loans	Alimony
Debt collection agency accounts	Secured debts where you keep the assets
Repossession deficiency balances	Tax debts less than three years old
Tax debts over three years old

Table: Erasable and non-erasable debt in Chapter 7 Bankruptcy

What Is Exempt vs. Nonexempt Property in Chapter 7 Bankruptcy? 

Exempt property in Chapter 7 bankruptcy is protected and typically includes essential belongings, home equity, and certain benefits, while nonexempt property can be sold to repay creditors and often includes cash, investments, and valuable assets.

Filing for Chapter 7 bankruptcy doesn’t mean that everything you own will be taken away and sold. During the bankruptcy process, it will be decided what items of property will be liquidated and what you can keep. Remember that the idea is to help you pay off your debts and move on with your life, not to cause further problems for you.  

Depending on what state you're in, exempt property may vary. There is a list of exempt property set at the federal level, and most states also have their own exemption lists. Some states have opted out of the federal exemptions and set their own, which means anyone filing for bankruptcy in those states must use the state exemption list. Where states have not opted out of federal exemptions, debtors can choose which exemption list they use. 

Exempt Property in Chapter 7 Bankruptcy 

It’s important to discuss possible property exemptions with your attorney as the situation can be quite complex. That said, exemptions often include: 

• Reasonably necessary clothing, household goods and furnishings 

• Equity in your home, up to a certain amount 

• Tools needed for your job, up to a certain value 

• Motor vehicles worth up to a certain value  

• Jewelry up to a certain value 

• Benefits like public assistance (welfare), social security, and unemployment  

• Personal injury awards 

• Pensions 

Non-exempt Property in Chapter 7 Bankruptcy 

Some property is not exempt and will be liquidated to clear the debts owed. Again, exact exemptions may depend on the state, but non-exempt property typically includes: 

• Cash, money held in bank accounts, and investments  

• Homes or vacation homes that are not your main residence 

• Motor vehicles that are not your main vehicle 

• Valuable family heirlooms and collections  

• Valuable musical instruments (unless you’re a professional musician) 

Exempt Property in Chapter 7 Bankruptcy	Non-Exempt Property in Chapter 7 Bankruptcy
Reasonably necessary clothing, household goods, and furnishings	Cash, money held in bank accounts, and investments
Equity in your home, up to a certain amount	Homes or vacation homes that are not your main residence
Tools needed for your job, up to a certain value	Motor vehicles that are not your main vehicle
Motor vehicles worth up to a certain value	Valuable family heirlooms and collections
Jewelry up to a certain value	Valuable musical instruments (unless you’re a professional musician)
Benefits like public assistance (welfare), social security, and unemployment
Personal injury awards
Pensions

Table: Exempt vs. Non-Exempt Property in Chapter 7 Bankruptcy

How to File for Chapter 7 Bankruptcy 

The first step to take if you’re struggling with debt and considering bankruptcy is to see a credit counselor. They will help you to understand your financial options and explore potential alternatives to bankruptcy, as well as explain the different bankruptcy types. 

Once you’ve confirmed that Chapter 7 bankruptcy is the best way to move forward, the process goes like this: 

1. Check your eligibility: To qualify for Chapter 7 bankruptcy, you must pass a means test that assesses your financial situation. Additionally, you must not have received a Chapter 7 discharge in the previous eight years or a Chapter 13 discharge in the previous six years.  

2. Complete credit counseling: To file for bankruptcy, you must attend credit counseling with a government-approved counseling agency no more than 180 days before filing and receive a certificate of completion. 

3. Gather your documents: You’ll need to provide a lot of financial information, including details of your income and expenses, any assets you own such as property or vehicles, checking, savings and retirement accounts, and how much debt who owe and to whom. 

4. Fill out the forms: There are several forms to complete before you can file your petition, which can be found on the US government website. Your credit counselor will be able to advise you on which forms you need to complete and what proof you need to provide. 

5. File your petition: Once you have your forms and documents together, you can send them to the US Bankruptcy Court for your area and arrange payment. Once the paperwork is filed, any creditors must stop trying to collect from you. 

6. Work with the trustee: The bankruptcy trustee assigned to your case will contact you and may ask for extra information. Work with them to help the process go smoothly. If you have non-exempt assets, they may be sold at this point. 

7. Attend the meeting of creditors: A meeting between you, your trustee, and any creditors who wish to ask any questions about your situation. 

8. Complete a debtor education course: Before the debt can be discharge, you must complete this course and provide a certificate of completion to the court. 

9. Receive your discharge order: Once all steps have been completed, the eligible debts will be discharged, and you will receive an official notice from the court.  

How Much Does Chapter 7 Bankruptcy Cost? 

Chapter 7 bankruptcy cost between $358 – $438 just in fees, and if you need to hire an attorney, expect to pay around $1000 – $3500, depending on the complexity of your case and where you live. So filing for bankruptcy isn’t free. These are the specific charges involved: 

• Case filing fee: $245 

• Administrative fee: $78 

• Trustee surcharge: $15 

• Pre-filing credit counseling: $10 – $50 

• Pre-discharge debtor education course: $10 – $50 

These fees can usually be paid in installments, and in certain cases some may be waived completely.

How to File Chapter 7 Bankruptcy Yourself 

Self-filing is possible, but bankruptcy is full of complex legal procedures which are challenging to navigate. There are no guarantees when filing, and for most people, working with an attorney is the best way to increase the likelihood of a successful outcome.  

Attempting to go through the process alone increases the chances of making errors that could lead to your case being rejected. If you do decide to go it alone, make sure to consult a credit counselor first. There are also resources like Upsolve that can help with filing documents. 

Duration and Impact on Credit 

Filing for Chapter 7 bankruptcy has significant implications for your credit report and future financial activities. That’s why it should only be undertaken as a last resort. That said, the impact is not permanent, and the fresh start offered by Chapter 7 bankruptcy can have a positive effect on your credit in the long term. 

How Long Does Chapter 7 Bankruptcy Stay on Your Credit Report? 

Chapter 7 bankruptcy stays on your credit report for up to 10 years, lowering your credit score and potentially making it difficult to get credit. However, with proactive financial management, your credit report can recover. 

More Debt-Relief Options 

Chapter 7 bankruptcy is just one route for dealing with debt. Other types of bankruptcy are used in different situations, and there are several other types of debt relief to explore before deciding on bankruptcy. 

Chapter 13 Bankruptcy 

While Chapter 7 bankruptcy involves selling off the debtor’s non-exempt property (asset liquidation), Chapter 13 bankruptcy allows debtors to keep assets and repay debts over time. Which type to choose depends on income, asset value, and long-term financial goals. 

Chapter 11 Bankruptcy 

Chapter 11 bankruptcy allows businesses to reorganize their debts while continuing to operate. It allows companies to restructure their finances and create a plan to pay creditors over time. 

Bankruptcy Alternatives 

There are several debt relief options to try before bankruptcy. A credit counselor can help you decide what route to take.

Debt management plans 

Debt management plans are structured repayment programs designed to help people pay off their debts over a set period, with potentially reduced interest rates. These plans involve working with a credit counseling agency to negotiate with creditors and create an affordable payment schedule.   

Debt consolidation

Debt consolidation (link) involves combining multiple debts into a single loan or credit card, usually with a lower interest rate and a more manageable repayment plan. This method can simplify debt repayment and potentially reduce monthly payments. 

Debt settlement 

Debt settlement involves negotiating with creditors to reduce the total amount of debt owed. This option can provide significant debt relief but may negatively affect your credit score. 

Is Chapter 7 Bankruptcy the Right Choice for You? 

Chapter 7 bankruptcy is a way for individuals to clear eligible debts and move forward with their lives. Although it’s an extreme step, bankruptcy can create a clean financial slate and allow applicants to rebuild their finances. Because the process involves selling off assets and stays on your credit record for ten years, it’s important to try other debt relief options first, such as a debt management plan or debt consolidation.