When you don’t have enough income to pay your bills each month, Chapter 7 bankruptcy can help get rid of qualifying debt quickly. And you won’t lose everything you own. Here’s how Chapter 7 works:
- You can keep property you’ll need for your fresh start.
- Property you can’t protect will be sold for the benefit of creditors.
- You can wipe out qualifying debt if you meet the income requirements.
Should I File for Chapter 7 Bankruptcy?
Filing for bankruptcy is a big step—and most people don’t want to file unless there’s no other option. Reviewing some of the Chapter 7 bankruptcy basics can help you decide whether Chapter 7 is the right choice for you.
- Your income meets discharge qualifications. Your income must be below your state’s median income for a household of your size to be eligible for a Chapter 7 discharge. You can determine whether you are qualified by taking the “means test”—a test that analyzes your income after allowing you to subtract certain deductions (more below).
- You’re broke after paying monthly living expenses. Even if you pass the means test, you won’t qualify if you have money left over at the end of the month (disposable income). The court assumes that people can use disposable income to pay creditors and, if you have it, will convert the case to a Chapter 13 bankruptcy.
- You don’t own much property. In Chapter 7 bankruptcy, you can keep (exempt) the property that you’ll need to maintain a modest home and job. The bankruptcy trustee appointed to your case will sell any additional property—called “nonexempt” property—and distribute the proceeds to your creditors. You can check your state’s exemption laws to find out how much exempt property you’re entitled to keep.
- You can keep up your house or car payment, or you’ll let the property go back to the bank. As long as you’re current on your house or car payment—or any other secured debt that allows the creditor to take back the property if you fail to pay—and you’re able to continue making the payment after filing for Chapter 7, you can keep the property. However, if you’re behind on a secured debt before you file for Chapter 7 bankruptcy, you stand to lose it. The creditor can ask the court to lift the “automatic stay”—the order that prevents creditors from collecting from you during bankruptcy—and, if successful, proceed with a foreclosure or repossession.
- Your debts qualify for discharge. Not all debts get wiped out, or “discharged,” in bankruptcy. Certain debts—such as recent income taxes, family support obligations, and student loans—stick around until you pay them off (more on this below). If you have this type of nondischargeable debt, you’ll want to consider Chapter 13 before filing for bankruptcy. By contrast, if your debt consists of collection accounts, outstanding credit card balances, medical bills, personal loans, unsecured judgments, and overdue utility bills, then you’re in luck. Chapter 7 bankruptcy discharges those debts.
Just because you can qualify for Chapter 7 doesn’t mean it’s best for you. Your particular obligations create a unique financial picture. Here are some examples of situations that don’t call for Chapter 7:
- You want to stay in a house in foreclosure. Chapter 7 bankruptcy won’t help you because it doesn’t have a mechanism to help you catch up on payments. The better choice might be to bring your mortgage current over time using a Chapter 13 repayment plan. The same holds true if you’re behind on a car payment and you want to avoid repossession.
- You owe recent taxes, domestic support, or some other nondischargeable debt. Chapter 7 won’t get rid of nondischargeable obligations, so your creditors will still be able to collect after the case is over. By contrast, Chapter 13 bankruptcy will let you pay off these types of debts over three to five years. During that time, you won’t need to worry about debt collectors beating at the door.
- Your income is too high to qualify for a Chapter 7 discharge. If you make too much to pass the means test, you’ll need to file for Chapter 13 for bankruptcy relief. You can learn more about the benefits of Chapter 13 bankruptcy in Chapter 13 Wage Earner Bankruptcy Basics.
Will I Qualify for a Chapter 7 Discharge?
Under the Chapter 7 means test, if your average gross income for the six months before filing is less than the median income of your state, you automatically qualify. If your income exceeds the median, you might still be eligible because the second step of the test allows you to deduct certain expenses, such as income taxes, health care premiums, and childcare costs, from your gross income.
To find your state’s median income, visit the U.S. Trustee website. In the box titled, “Data Required for Completing the 122A Forms and the 122C Forms,” select the most recent date. Click the “Median Family Income Based on State/Territory and Family Size” link to access the median income chart.
Will I Get to Keep My Property?
Yes—at least some of it. The amount you can keep, or “exempt,” depends on your state’s exemption laws. Most states allow you to protect essential household goods, such as kitchenware, furniture, bedding, an inexpensive car, and some jewelry. Other types of exempt property include:
- your residence
- retirement funds, such as 401k accounts
- Social Security, veteran’s benefits, and disability benefits, and
- trade or professional tools.
But what happens if you don’t want to give up your property? There is a solution: You can buy it from the bankruptcy trustee—and usually at a discount.
Many people end up keeping all of their possessions because they don’t own any nonexempt items. But those who own a mix of exempt and nonexempt items will find that the latter will become part of their “bankruptcy estate,” which the trustee will sell for the benefit of their creditors. Common types of nonexempt property include:
- homes with more equity than can be exempted (the exempt amount will be returned to you)
- timeshares and rental property
- boats, recreational vehicles, and motorcycles
- artwork and collectibles
- non-retirement investment accounts, and
- stock or other ownership interests in a business, LLC, or corporation.
Of course, most people don’t want to lose any property, including nonexempt things. But from a practical standpoint, losing a treasured but nonexempt item can make sense if the total amount of debt wiped out will be significantly greater than the value of that item.
Example. Henry had $80,000 in credit card debt and could exempt all of his property except a classic 1964 Austin-Healey valued at $7,800. Harry decided to file for bankruptcy because even after relinquishing the car, he still netted $72,200 in debt savings.
But what happens if you don’t want to give up your property? There is a solution: You can buy it from the bankruptcy trustee—and usually at a discount. Sometimes the trustee will even let you pay for it in payments.
Example. Even though Henry knew filing for bankruptcy was the right thing to do, the Austin-Healey was the first car he ever bought, and after keeping it in pristine condition for years, he couldn’t bear to part with it. He didn’t have to. The trustee didn’t care who bought the Austin-Healy as long as the bankruptcy estate received the sale proceeds. So he deducted 20%—the amount it would cost the trustee to sell the car—and sold it to Henry for $6,240. On top of that, the trustee gave Henry ten months to pay for it.
Will All of My Debts Get Wiped Out?
Chapter 7 bankruptcy wipes out almost all unsecured, nonpriority debts, including credit card debt, medical bills, personal loans, many lawsuit judgments, income taxes over three years old (though not always), and past-due utility bills.
Not all debts get discharged, however. For instance, you’ll remain responsible for the following:
- secured debt (a mortgage or car payment) if you keep the property
- priority unsecured debt (most income taxes, delinquent family support payments, and penalties and fines owed to the government), and
- student loans.
To find out more about the debt that survives bankruptcy, see Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.
What Happens After Filing?
A bankruptcy case starts when the debtor files the official paperwork (the petition and schedules) disclosing income and property, debts, and prior transactions.
Here’s what will happen next.
- The automatic stay order will stop collection activity. As soon as you file, the court automatically issues an order called a “stay.” Once the automatic stay is in place, your creditors cannot contact you or attempt to collect from you. The calls come to a halt.
- You’ll provide documents and answer questions at a hearing. About one month after you file, you’ll go to the 341 Meeting of Creditors—the one court appearance you’re required to attend. Seven days beforehand, you must give the trustee a large group of documents, called 521 documents. At the 341 meeting, you’ll present identification and the trustee will ask you a series of questions about your petition answers. Creditors can attend, but rarely show up, and most meetings last less than five minutes.
- You’ll file your post-filing course certificate. You’ll complete two courses in your Chapter 7 case—one before you file and one afterward. The second course is called the debtor education course.
- You’ll receive your discharge. The court will mail your discharge notice 60 days after your 341 meeting. If your case is a “no asset” case—meaning your creditors get nothing—the court will close your case shortly after that. A no asset case typically takes three to four months. By comparison, asset cases remain open until all assets are distributed, which can take several months or more, depending on the complexity of the case. For example, the trustee might have to wait for a buyer to purchase a hard-to-sell piece of property, or for your attorney to settle a bad faith lawsuit against your insurance company.
You’ll find answers to commonly asked questions in our Bankruptcy FAQs:
- Bankruptcy FAQ: Should You File?
- Bankruptcy FAQ: Preparing to File
- Bankruptcy FAQ: The Chapter 7 Means Test
- Bankruptcy FAQ: What Can I Keep in Chapter 7 Bankruptcy?
- Bankruptcy FAQ: After You File
Questions for Your Attorney
- Is filing for Chapter 7 bankruptcy a good choice or would a Chapter 13 bankruptcy make more sense?
- How long will a bankruptcy affect my credit?
- Will I have a difficult time getting a job or renting a house after my case ends?