The Ultimate Guide to Bankruptcy

Written by the Upsolve team members Attorney Andrea Wimmer, Attorney Jonathan Petts, and Attorney Tina Tran

This is a guide to bankruptcy for non-lawyers. It aims to educate the average American consumer about personal bankruptcy, including: bankruptcy basics & important terms, different types of bankruptcy, Chapter 7 bankruptcy process, and more!

Part 1

Introduction to Bankruptcy

Personal bankruptcy simply means that a person - or married couple - is the one filing bankruptcy. Bankruptcy...

  • Automatically stops debt collection as soon as the case is filed
  • Wipes out eligible debts forever
  • Levels the playing field for debtors and their creditors

Someone who has fallen on hard times often has multiple banks, lenders, and credit card companies, and other debt collectors trying to collect money from them.

The bankruptcy process provides them with a breathing spell. It also gives them the opportunity to pay their creditors as much as they actually can afford to pay, without hardship and without losing property necessary to maintain a basic standard of living.

Bankruptcy clears all eligble debts

Most personal bankruptcy cases are Chapter 7 cases. Even though Chapter 7 is a “liquidation” bankruptcy, more than 90% of personal Chapter 7 cases result in no payment to creditors 1. The second most common type of personal bankruptcy is Chapter 13. In a Chapter 13 bankruptcy, the debtor pays a portion of their debt before receiving a discharge.

Businesses can also file bankruptcy. Even though it’s all under the same bankruptcy law, these commercial bankruptcy cases are much more complicated. Since learning about the nuances of commercial bankruptcy law won’t benefit the typical family struggling with debt, this guide focuses solely on personal bankruptcy.

Part 2

Important Terms

As with any legal matter, there are a great number of legal terms, terms of art, latin phrases, and definitions that come into play in the bankruptcy process. Here are some of the most important terms anyone learning about personal bankruptcy should know.


Automatic Stay

The bankruptcy law that prohibits creditors from trying to collect a debt once a bankruptcy case has been filed. It’s found in Section 362 of the Bankruptcy Code.

Bankruptcy Code

Title 11 of the United States Code. The part of the law that contains all U.S. bankruptcy laws. It’s Title 11 of the United States Code. It’s sometimes listed as 11 U.S.C. For example, 11 U.S.C. § 362 is a reference to the automatic stay provisions.

BAPCPA

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This was a major revision to the Bankruptcy Code, adding the Means Testing requirement for consumer filers.

Chapter 7 bankruptcy

A type of bankruptcy that can be filed by people and businesses, sometimes called the liquidation bankruptcy. See Parts 4 & 6 for more information.

Chapter 13 bankruptcy

A type of bankruptcy only available to people, sometimes called the reorganization bankruptcy. See Part 4 for more information.

Creditor

The person or business that is owed money.

Creditors’ Meeting

Also called the Meeting of Creditors or the 341 Meeting: Part of the normal bankruptcy process. In a personal bankruptcy, it often involves only the debtor and the case trustee and takes less than 10 minutes to complete. See Part 7 for details.

Debtor

The person asking for bankruptcy relief; the filer. In a case filed by a married couple, the spouses are referred to as the debtor and the joint debtor, or as Debtor 1 and Debtor 2.

Discharge

The court order that eliminates the debtor’s obligation to pay their creditors. It’s the filer’s primary goal in every Chapter 7 bankruptcy case.

Estate

When a bankruptcy case is filed, a bankruptcy estate is automatically created. It initially includes all of the debtor’s property. In a Chapter 7, the bankruptcy trustee controls the estate. See Part 8 for more information.

Exemptions

Laws that determine what kind of property the debtor can keep. Even though all of the debtor’s property is part of the estate, only property not covered by an exemption (“non-exempt property”) can be used to pay creditors.

Means Test

The analysis that determines whether someone qualifies for Chapter 7 bankruptcy. In Chapter 13, it is used to determine how long the repayment plan will be up to a maximum of 60 months (5 years) and how much the debtor can afford to pay to unsecured creditors.

No-Asset Case

A Chapter 7 case that does not result in a payout to creditors. If the debtor owns non-exempt property and funds are distributed to unsecured creditors, the case is called an “Asset Case.”

Proof of Claim

The document creditors are required to file to receive money from the estate. Most Chapter 7 cases are no-asset cases and creditors are not required to file a proof of claim.

Trustee

The person who manages the bankruptcy case. The trustee has a duty to make sure that non-exempt property is used to pay creditors. If all property is protected by an exemption, the trustee is done after completing the creditors’ meeting and filing a report with the court.

U.S. Trustee, Office of the United States Trustee or UST

The UST program oversees bankruptcy cases and trustees in 48 states. In Alabama and North Carolina, a Bankruptcy Administrator handles these duties instead.

Most of these terms are more than just “terms” and their significance and place in the bankruptcy process will be explained in more detail later in this guide. For more legal definitions in plain English click here.

Part 3

Types of Bankruptcy

There are three different types - or chapters - of bankruptcy a person can file:


Chapter 7 bankruptcy
This is the most common type of personal bankruptcy. Chapter 7 cases made up 65% of all personal bankruptcy cases filed in the United States between July 1, 2019 - June 30, 2020.2 The rest of this guide will focus on Chapter 7 bankruptcy.

Chapter 11 bankruptcy
Originally intended for businesses, individuals are also able to file Chapter 11 bankruptcy. These cases are quite complex and typically filed by high earners that have too much debt to qualify for a Chapter 13.

Chapter 13 bankruptcy
This is a reorganization for folks with regular income that can afford to pay some of their debts as part of a court approved repayment plan. The plan can’t last more than 5 years. Debt is either paid off through the bankruptcy plan or discharged at the end of the plan term.

Part 4

Types of Debt

The type of debt owed to a creditor determines how that debt (and the creditor) is treated in a bankruptcy case. These types of debt are:

The bankruptcy forms categorize debts into secured debt (listed in Schedule D), priority debt (listed in Part 1 of Schedule E/F), and non-priority unsecured debt (listed in Part 2 of Schedule E/F). Until December 2015, there was one Schedule E for priority debts and one Schedule F for non-priority unsecured debts. Now they’re combined into a single Schedule E/F.


Unsecured Debt

Payment obligations that are not secured by an interest in real or personal property are classified as unsecured debts. In the event of a default, an unsecured creditor can’t take any property from the borrower. Their only recourse is to file a lawsuit. Unsecured debt includes:

  • Credit cards
  • Medical bills
  • Personal loans, including payday loans
  • Student loans
  • Unpaid utilities bills, etc.

Secured Debt

The most common type of secured debt is “purchase money.” If you agree that the bank can take back the property you’re buying with the money you’re borrowing, you give the bank a purchase money security interest. The most classic examples for secured debt are car loans and mortgages.

To keep the property securing the debt, the filer has to continue paying the debt. That doesn’t necessarily mean that the debt hasn’t been discharged, but it does mean that filing bankruptcy doesn’t result in the filer getting a free car or house.

If you have mortgages:

Homeowners who are current with their mortgage payments can keep their home even after filing Chapter 7 bankruptcy as long as they keep making their mortgage payment. Everything stays basically the same. Since there is no requirement in the Bankruptcy Code to reaffirm a real property loan, the filer’s personal liability on the mortgage is discharged. If the filer stops making their mortgage payment at any time, the bank can still foreclose on the property. The discharge only protects the homeowner from a deficiency judgment after the foreclosure.

If you have car loans & other personal property loans:

In addition to listing car loans and other debt secured by personal property on Schedule D, the property has to be disclosed on the filer’s Schedule A/B. Additionally, the filer has to let the court and the creditor know what they want to do about the debt. The Bankruptcy Code gives the filer 3 options:

Option 1 - Surrender the property (and discharge the debt)

The car is repossessed by the bank and the debtor’s obligation to pay the loan balance is wiped out. This can be especially helpful for cars that are “upside down” because the loan balance is much greater than the value of the car.

To surrender a vehicle, the filer simply indicates their intent to do so on their Statement of Intentions (Official Form 108) and sends a copy to the bank after filing the case. The bank will eventually repossess the vehicle, either after coordinating the pick up with the filer, getting an order from the court lifting the automatic stay thereby authorizing the repossession, or once the discharge has been entered.

Option 2 - Redeem the property (and discharge the debt)

A redemption also allows the filer to get out of an upside down car loan. Here the bank receives an amount equal to the car’s fair market value in one lump sum. The balance of the loan is discharged. Since redeeming a car requires the ability to pay a lump sum to the bank, it’s not a frequently used option. There are banks who specialize in making “redemption loans” but they often carry a high interest rate.

Option 3 - Reaffirm the loan and keep both, the car and the car loan

About 20% of consumer cases include the reaffirmation of a car loan.3 When a debtor signs a reaffirmation agreement, they agree to exclude the debt from the bankruptcy discharge. Since this can significantly lessen the positive impact of the bankruptcy filing, either the debtor’s attorney or the bankruptcy court have to approve the reaffirmation.

The requirement to sign a reaffirmation agreement in order to retain a vehicle following a bankruptcy filing was another addition to the bankruptcy laws by BAPCPA. Before, debtors could simply let their car loans “ride through” as long as all payments were made timely. Most, but not all, car loan lenders will allow the filer to complete a “ride through” in the event the reaffirmation agreement is not approved by the bankruptcy court.


Priority Debt

Certain obligations are given priority treatment under the Bankruptcy Code. This primarily matters in asset cases, where the trustee distributes funds to unsecured creditors.

Examples of priority debts include child support, spousal support (alimony), and tax debts, as long as there is no tax lien. Since the priority designations determine how much a creditor receives, and because secured creditors are paid by the collateral that is securing the debt, a debt can be either a priority unsecured debt or a secured debt, but not both.

In asset cases, priority debts are paid off before unsecured creditors can receive any funds from the bankruptcy estate. Priority debts are not dischargeable in bankruptcy, but not all non-dischargeable debts are given priority status.


Non-Dischargeable Debt

Certain debt can’t be eliminated by filing bankruptcy, though it’s not always automatic. Debts that are not dischargeable in bankruptcy, without requiring any involvement by the creditor, include:

  • recent tax debts
  • child support and alimony
  • student loans
  • criminal restitution awards
  • wrongful death and personal injury debts incurred while driving under the influence of alcohol or drugs

Some debts are discharged only if the creditor doesn’t object to their discharge. They include:

  • debts incurred through certain bad acts, like lying on the credit application
  • debts incurred with the intent to discharge them in bankruptcy
Part 5

The Means Test

The analysis to determine whether someone qualifies for Chapter 7 bankruptcy is called the “Means Test.” It was added to the Chapter 7 requirements in 2005 to stop people with the means (i.e. the money) to pay some of their debt from filing Chapter 7 bankruptcy. Those whose household income exceeds the income limits may nevertheless qualify for a Chapter 7 case when taking into consideration their reasonable and necessary living expenses. The Means Test only applies to consumers.


Part 1: Income limits

All household income received in the 6 months before filing the case has to be included in the Means Test calculation, including wages, bonuses, income from rental properties, other business income, and regular contributions to the household income by third parties. It does not include income received under the Social Security Act. Someone receiving only SSI or SSDI automatically passes the Means Test.

If your gross income (before taxes and other deductions are taken out) is less than the median income in the state, you “pass” the Means Test and can file Chapter 7. Someone earning more than the income limits may still qualify for Chapter 7 under part 2 of the Means Test analysis.

Part 2: Paycheck deductions

The income limits only look at gross income, not the filer’s actual take home income. The second part of the Means Test accounts for the difference between net income v. gross income.

It subtracts tax withholdings and any other mandatory deductions from the filer’s paycheck. While voluntary contributions to a retirement account are not considered, health insurance, term life insurance for the debtor, disability insurance, and contributions to a health savings account are allowed deductions.

Part 3: Living expenses

The next step in the analysis looks at the debtor’s living expenses. After all, there are some expenses, like money spent on food, healthcare or housing, that are simply non-negotiable.

This is where things get a bit complicated because the Bankruptcy Code limits living expenses to an amount considered reasonable and necessary.

The amounts can be adjusted to take into account the filer’s actual circumstances, but only to the extent that they can document that their actual and necessary expenses - going forward - are higher than the “standard” amount.

While the median income information used in step 1 comes from the Census Bureau, the expense limits are calculated by the IRS. Additionally, some of the limits are based on national standards, while others are based on localized standards.

Note that the expenses are forward looking. Since the purpose of the Means Test is to determine whether someone could afford to make a payment to creditors through a Chapter 13, the Means Test disregards expenses that won’t exist going forward. That’s why a wage garnishment is not an allowed expense on the Means Test. It will stop once the case is filed and the automatic stay is in effect. The only exception here are garnishments for domestic support obligations like child support or alimony, as they’ll continue even after the case is filed.

Healthcare Costs

As of May 1, 2020, the IRS has determined that $56/mo for out-of-pocket healthcare costs (excluding health insurance) for an adult under 65 of age is reasonable and necessary. Everyone can deduct this much. It can be increased only if the filer can show that their actual monthly expenses for health care (such as prescriptions or doctor co-pays) are higher than that amount. In that case, the UST may ask the filer to provide documentation to support the increased deduction.

Secured & Priority Debts

If the filer has secured debt, their actual monthly payment on the secured debt is an allowed deduction. That’s because this payment will continue after filing. If the debtor intends on surrendering the property - eliminating the payment as a result - this is not allowed.

The debtor will continue to be liable for certain non-dischargeable priority debts, such as recent tax debts. Since these debts - just like secured debts - would have to be paid off in a Chapter 13 plan, the means test calculation allows a deduction for this as well. The monthly payment on the means test is based on the total amount of the priority debt divided by 60.

Other expenses may be taken into account as well. However, the income and expense analysis is pretty complex and depends on case law in effect in the district.

Part 4: Disposable income

If the allowed expenses are greater than the debtor’s income, there is no so-called “presumption of abuse” because the numbers show that the filer can’t afford to pay even a small portion of their debt.

If there is money left over after subtracting all allowed expenses, the amount is considered “disposable income” - or money that the person could put in a savings account. That income can be used to pay creditors. At this point, the analysis considers how much disposable income exists and whether paying this amount to creditors over a 5 year period would pay off at least 25% of the filer’s debt. If not, the person qualifies for Chapter 7 bankruptcy.

If the filer’s disposable income is sufficient to pay off more than 25% of their debt over a 5 year period, the bankruptcy law requires that person to file Chapter 13 bankruptcy, unless there are special circumstances.

Means Test TLDR

Anyone making less than the median income meets the Chapter 7 income limits. Especially for those with only one source of income, this is a straightforward analysis that can easily be accomplished without a lawyer.

For debtors who earn more than the income limits, Chapter 7 bankruptcy is possible if the means test calculation concludes they don’t have sufficient disposable income. Only a local consumer bankruptcy lawyer can competently complete this analysis to determine whether the person is eligible for Chapter 7 bankruptcy.

Part 6

Chapter 7 Process

Even though asset cases go on for more time than the more common no-asset case, the Chapter 7 process from filing to discharge is the same for everyone. This part will cover all the steps every Chapter 7 filer has to complete on their journey to a fresh start, including:

  1. Take a Credit Counseling Course
  2. Pass the Means Test
  3. Complete the bankruptcy forms
  4. File your forms
  5. The Discharge Track
  6. Take Debtor Education Financial Management Course
  7. The Case Administration Track

It will conclude with some information about how an asset case differs from a no-asset case and explain the difference between:

  • The Discharge Track and
  • the Case Administration Track

What happens before filing the case is different for everyone. Some folks hire a bankruptcy lawyer to walk them through the process, others get everything ready themselves. Either way, there are a few things everyone filing bankruptcy has to do before filing Chapter 7:

1. Take credit counseling

This has to be done in the 180 days before the case is filed. Without it, you’re not eligible to be a debtor in bankruptcy.

This is the most common type of personal bankruptcy. Chapter 7 cases made up 65% of all personal bankruptcy cases filed in the United States between July 1, 2019 - June 30, 2020. The rest of this guide will focus on Chapter 7 bankruptcy.

The courses are offered in person, over the phone, and online by a number of different credit counseling agencies across the country. Not all of them are approved in all districts. Since it only counts if your provider is approved, make sure to check the list of approved agencies on the UST's website.

2. Pass the means test

In passing BAPCPA in 2005, Congress created the Means Test requirement. They wanted to make sure that only those consumers who truly couldn’t afford to pay any of their debt were able to get relief under Chapter 7 of the Bankruptcy Code.

The Means Test determines whether someone can file Chapter 7 bankruptcy. It’s not really a test like the SAT or ACT, but an analysis of the debtor’s income and expenses from a big picture point of view.

For more information about the Means Test, read Chapter 5.

3. Complete the bankruptcy forms

The petition asking the bankruptcy court for relief - called the Voluntary Petition for Individuals Filing for Bankruptcy (Official Form 101) is only 9 pages. But, as part of the bankruptcy process, the filer has to provide a pretty detailed overview of their financial situation. The information every debtor has to disclose includes:

  • who they owe money to (their creditors)
  • what they own (their assets)
  • how much they earn (their income)
  • how much they spend (their expenses)
  • an overview of their financial transaction history

By the time all is said and done, the debtor will have completed 23 federal bankruptcy forms plus any “local forms” required in their district. It’s not uncommon for this forms package (often simply called “the petition”) to reach 70 - 100 pages.

Preparing the bankruptcy forms is the most work intensive part of the process. Many filers work with a bankruptcy lawyer to help them prepare their forms and represent them in their case. However unlike businesses, individuals can represent themselves in bankruptcy court.

4. File your forms

The filing date - when the petition is submitted to the bankruptcy court - officially starts the case. The automatic stay goes into effect right away and the following happens pretty quickly thereafter:

  1. A case number, bankruptcy judge, and case trustee are assigned
  2. The 341 meeting is scheduled
  3. A notice about the case is sent to all creditors
Other Important Dates

The filing date determines the date of the 341 meeting. The date of the 341 meeting in turn determines certain other important deadlines:

  • Deadline to Object to Exemptions: 30 days after the 341 meeting is concluded
  • Deadline to Object to Entry of Discharge: 60 days after date set for 341 meeting

From there, the case proceeds on two separate tracks. The “discharge track” and the “case administration” track.

5. The Discharge Track

The filer's journey to a fresh start has made a big milestone! Once the case is filed (and the $335 filing fee paid or waived), the only other steps every individual Chapter 7 debtor has to take are:

  1. Submitting pay stubs & tax returns to their case trustee
  2. Attending their 341 meeting
  3. Completing the debtor education course

As long as all of this gets done by the deadline for creditors to file an objection, the discharge order is automatically entered.

See Part 7 for more information about the 341 meeting.

6. Debtor Education Financial Management Course

This is the second of two courses every person filing bankruptcy has to complete. It’s usually a little bit longer than the credit counseling course but it can still be done in one session.

Since it’s a requirement under the Bankruptcy Code, it’s important to take the course from a provider approved by the UST. Most providers offer both courses, but that is not guaranteed. The UST’s website provides a separate list of approved course providers for each state.

If a debtor doesn’t complete this course (or completes it but doesn’t file the certificate of completion with the court), their case will be closed without a discharge, once the trustee is done with the case administration track. In no-asset cases, this typically happens after the 60 day deadline to object to the discharge has passed.

7. The Case Administration Track
No Asset Cases:

In a no-asset case, this overlaps with the discharge track. The trustee completes their required tasks and files a “Report of No Distribution” with the court when done. This report lets everyone know that the debtor doesn’t own any non-exempt assets and that no payments will be made to creditors as a result. The court will close the case shortly after the discharge is entered.

Asset Cases:

In an asset case, on the other hand, the case administration track extends past the discharge date. This part of the process is unique to every case, as it depends on the type of nonexempt assets in the case. Sometimes, it’s a matter of waiting for a tax refund; other times it’s a class action lawsuit that’ll take years to complete before any payouts are made. Either way, the case stays open until the trustee is done. In addition to liquidating (or selling) the nonexempt assets, this includes:

  • filing a notice to all creditors to let them know the deadline to file a claim in the case
  • paying creditors who file a proof of claim in order of priority
  • filing detailed reports about the case with the court

See Part 8 for more on property and exemptions.

Often, there is no need for the filer to do anything once the trustee’s initial investigation and review of the case is complete. But, it’s still important to provide the trustee and the court with up-to-date contact information and pay attention to any correspondence from the trustee, even after a discharge has been granted.

Sometimes the trustee needs additional information or cooperation from the filer to complete their work. Debtors have an obligation to cooperate with the trustee in this process. If they don’t, the trustee can ask the court to revoke the filer’s discharge. This happens only rarely, but it’s a pretty powerful incentive for debtors to comply with this requirement.

Part 7

341 Meeting of Creditors

About 20 - 40 days after a bankruptcy case is filed, the debtor has to attend a meeting with their trustee. This meeting is known as the

  • Meeting of Creditors
  • Creditors' Meeting
  • 341 meeting
  • Trustee meeting

Yes, they all mean the same thing. No, creditors usually don’t show up.


Section 341 of the Bankruptcy Code requires everyone filing bankruptcy to attend a meeting with their creditors. Since the case trustee acts as a go-between the filer and their unsecured creditors, it is rare to see any actual creditors show up to this meeting. Instead, it's essentially a recorded sit-down with the trustee.

After the trustee checks their picture ID and proof of social security number, the filer is put under oath. This ensures that the filer answers the trustee's questions truthfully.

The trustee then asks the filer certain standard questions they ask every individual Chapter 7 debtor. If there's something unusual about someone's case, such as a valuable nonexempt asset or a money transfer to a family member, the trustee may ask about that as well.

Ultimately, it's not as scary as it sounds. As long as you truthfully answer the trustee's questions, it'll be over before you know it. Most 341 meetings take less than 10 minutes from start to finish.

Before the 341 meeting is over, the trustee asks whether any creditors are present for the case. As mentioned, this rarely happens, so it's mostly a formality. If a creditor does attend a meeting, they get the chance to ask the debtor some additional questions about their financial affairs while they're still under oath and being recorded.

Once done, the trustee will announce that the meeting has been concluded. This means the clock for certain deadlines in the case starts running and the filer is well on their way to getting their discharge.

Part 8

Exemptions

In a Chapter 7 bankruptcy certain property can be sold (liquidated) to pay some of the filer’s debts. Exemptions protect property from being sold for the benefit of creditors. This part will cover:


Do I have to include my _________ in the bankruptcy? How will they know I didn’t include it?

These are two of the most common questions folks looking to file bankruptcy have. The short answer is (1) everything is included and (2) it doesn’t matter how “they” will know, assume they will.

The bankruptcy system is designed to give relief to the “honest but unfortunate debtor.” That’s why a good rule of thumb when preparing for a bankruptcy filing is to “disclose everything.” Yes, that includes listing the old dresser you got from your grandmother when you were a kid that isn’t really worth much. It includes the cash you’ve been putting into a coffee can $5 at a time for a rainy day. It includes, well, everything.

However, it’s a bit misleading to say property is “included” in a bankruptcy case. The filer’s property - or assets - are disclosed in their Schedule A/B. Whatever ownership right the filer has in these assets becomes property of the bankruptcy estate.


The Bankruptcy Estate

When a bankruptcy petition is filed, a bankruptcy estate is automatically created. Everything the filer has an ownership interest in goes into this estate. The bankruptcy trustee acts on behalf of the estate. Their job is to make sure property of the estate that is not protected by an exemption is sold and the proceeds distributed to eligible creditors.

A quick sidebar about ownership interest: if it’s your stuff, you have an ownership interest in the property. It doesn’t matter how you got the property. It doesn’t matter that there is no written record of ownership. It doesn’t matter that it’s really not worth anything. It doesn’t even matter that you haven’t actually received it yet.


Exemptions

Exemptions are laws that protect a person’s property against claims by their creditors. Since creditor collections are a matter of state law, every state has exemptions laws. So, even if multiple creditors are trying to collect from a single person, there’s only so much property they can reach.

When a bankruptcy is filed, creditors are no longer able to go after the filer’s property. It’s now property of the bankruptcy estate. The trustee, as the representative of the bankruptcy estate is also limited by the exemptions the filer claims.

In addition to state exemptions, there are the federal bankruptcy exemptions. They are set forth in the Bankruptcy Code, but states are allowed to opt-out of the federal bankruptcy exemptions. Opt-out states limit filers to the exemptions provided in state law.

All other states allow filers to choose between using the state law exemptions or the federal bankruptcy exemptions. It’s one or the other, you can’t mix and match based on what works best for you. Similarly, you can’t move to a new state to file bankruptcy simply because their exemptions suit you best. There is a 2-year waiting period.

Like property, exemptions protecting property also come in different shapes and sizes. Some protect a category of items (e.g. household goods, furniture, or tools of the trade) up to a certain amount. Some, but not all, of these types of exemptions contain a limit on how much a single piece of property within that category can be worth. For example, under the federal bankruptcy exemptions, the filer can protect a combined value of up to $12,625 in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments. But, a single item can’t be worth more than $600 by itself.

Some exemptions protect assets regardless of value. Most retirement accounts, for example, are protected at 100% of their value. Some states, and the Bankruptcy Code provide for a so-called “wildcard exemption” which can be used to protect any type of property and most, but not all states, have a homestead exemption protecting the filer’s interest in real estate used as a home.

If a property’s value is greater than the allowed exemption, it’s considered non-exempt equity.


Property Valuation

So far you’ve learned that all property initially goes into the bankruptcy estate and that some property is protected - usually up to a certain amount - by exemptions. Since the actual value of an asset plays an important role in the determination of whether a certain piece of property can be liquidated by the trustee, the filer provides the trustee with a value estimate for all of their property.

Your property’s value is not:

  • what you paid for it
  • what you owe on it (if you’re still making payments)
  • what a new version of it sells for now

Your property’s value is how much someone would pay for your specific piece of property, in its current condition. For example, say you bought your couch for $1,000 6 years ago. Even though you paid $1,000 for it (or possibly even more, if you financed the purchase and had to pay interest), the most you could hope to get for it now is $150. That is the value that matters. Remember, the purpose of the valuation is to give the trustee an idea of whether they might be able to sell the property to recover funds on behalf of the bankruptcy estate.

Property that is fully exempt because it’s worth less than the available exemption: Neither the trustee nor anyone else can use the property to pay down the filer’s debt.

Property that is not fully exempt because it’s worth more than the available exemption: Depending on how much value is unprotected, the trustee can sell the property. In that case, the filer receives the amount of the exemption in cash. At times, filer’s are able to “buy back” the nonexempt equity from the trustee to keep the property.

Property that is not protected by an exemption at all: Assuming there is enough nonexempt property to make a “meaningful” distribution to unsecured creditors, nonexempt property is sold. It’s not clear at all what a “meaningful contribution” is.

What is clear is that just about everyone owns something that’s not protected, but it’s usually worth less than $500 and not enough for the trustee to deal with. What is also clear is that the vast majority of Chapter 7 cases don’t make any distributions to creditors, meaning most filers keep all of their property.

Part 9

The Bankruptcy Discharge

Getting a bankruptcy discharge is the primary goal of every personal bankruptcy. A bankruptcy discharge:

  • is a federal court order
  • wipes out the filer’s obligation to pay their debt, with some exceptions
  • is why people file bankruptcy

The bankruptcy discharge is what gives you a clean slate and a fresh start. Once the discharge has been granted by the court, creditors are forever barred from trying to collect the debt. If they do, they can get in serious trouble for violating the court’s order.

A Chapter 7 bankruptcy discharge wipes out most unsecured debts. Certain debts can’t be eliminated in Chapter 7 bankruptcy. They include:

  • recent tax debts
  • child support
  • alimony
  • criminal restitution

Student loans are not discharged by default. The filer has to show, through a separate court proceeding, called an adversary proceeding, that not discharging their student loans will cause them and their family undue hardship. Unfortunately, only 0.1% of filers with student loans try to do this. Of those who do, 40% are successful.4

Once a person receives a Chapter 7 discharge, they are not able to petition the court for another Chapter 7 discharge for a minimum of 8 years. So, while it’s possible (and not that uncommon) to file bankruptcy more than once in a lifetime, varying waiting periods depending on the type of bankruptcy filed apply.

Final Chapter

Frequently Asked Questions

If you’ve made it this far, congratulations! You now have a better understanding of how personal bankruptcy works than most. If you’re considering filing bankruptcy to deal with your debts, here are answers to some of the questions you may still have.

How do I know which type of bankruptcy is right for me?

That depends on a number of factors specific to your financial situation. Both Chapter 7 and Chapter 13 bankruptcy have pros and cons. Learn more about the differences between the two, and the downsides of each in our Learning Center article titled Chapter 7 vs. Chapter 13 Bankruptcy.

Does bankruptcy help with a wage garnishment?

Yes. If a credit card company or bank is garnishing your wages, they have to stop as soon as your petition is filed with the court. Learn more with our article, "How Can I Stop My Wages From Being Garnished?"

Will filing bankruptcy ruin my credit forever?

Not at all. Even though your credit score will take a hit initially, most Chapter 7 filers often find they have a higher credit score within 2 years of getting their discharge than before they filed. Learn more with our article, "How will bankruptcy affect my credit?"

Can I keep my car if I file Chapter 7 bankruptcy?

That depends. If you’re still paying on a car loan, you’re only able to keep the car if you’re current and keep making your payments. If it’s paid off, you’re able to keep your car as long as it’s worth less than the available exemption. Learn more with our article "Can I Keep My Car If I File Chapter 7 Bankruptcy?".

Can I buy a car after filing Chapter 7 bankruptcy?

Yes. While your first car after filing bankruptcy may not be your dream car, you absolutely can. Most Chapter 7 bankruptcy filers report receiving a lot of advertisements for cars shortly after filing.

Can I buy a house after filing Chapter 7 bankruptcy?

Yes, though you may have to wait a couple of years while rebuilding your credit before you’ll qualify for a mortgage.

Can I file bankruptcy online?

If you’re not a bankruptcy lawyer, you’re probably not going to be able to submit your bankruptcy petition to the court online. But, as the federal courts are catching up to the digital age, there are some exceptions to this general rule and other parts of the bankruptcy process you’ll definitely be able to complete online.

Is there a limit to how often a person can file bankruptcy?

Yes. Bankruptcy laws require at least 8 years to pass between Chapter 7 filings. The time period is shorter if one or both of the cases are filed under Chapter 13.

Where can I learn more about filing bankruptcy?

Upsolve’s Learning Center contains hundreds of articles about personal bankruptcy and related topics!

Sources:
  1. American Bankruptcy Institute. (2002). Bankruptcy by the Numbers - Chapter 7 Asset Cases. ABI Journal. Retrieved August 4, 2020, from https://www.abi.org/abi-journal/chapter-7-asset-cases
  2. US Courts. (2020, June). Bankruptcy Filings Fall 11.8 Percent for Year Ending. Judiciary News. Retrieved July 29, 2020, from https://www.uscourts.gov/news/2020/07/29/bankruptcy-filings-fall-118-percent-year-ending-june-30
  3. US Courts. (2019, December). Reaffirmation Agreements in Chapter 7 Cases Terminated—During the 12-Month Period Ending December 31, 2019. Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Retrieved August 27, 2020, from https://www.uscourts.gov/statistics/table/bapcpa-4/bankruptcy-abuse-prevention-and-consumer-protection-act-bapcpa/2019/12/31
  4. Iuliano, Jason. (2011, July). An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard. 86 American Bankruptcy Law Journal 495. Retrieved August 27, 2020, from https://ssrn.com/abstract=1894445 or http://dx.doi.org/10.2139/ssrn.1894445
About the Authors:

Attorney Andrea Wimmer

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Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team full time in August 2019. While in private practice, Andrea ha... read more about Attorney Andrea Wimmer

Attorney Jonathan Petts

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Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and Board Chair of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in... read more about Attorney Jonathan Petts

Attorney Tina Tran

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Tina Tran is the managing bankruptcy attorney for Upsolve, the largest consumer bankruptcy non-profit in the United States. She received her Juris Doctorate degree and Certificate in Advocacy from Loyola University Chicago School of Law. She is licensed to practice law in Illinoi... read more about Attorney Tina Tran

Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

To learn more, read why we started Upsolve in 2016, our reviews from past users, and our press coverage from places like the New York Times and Wall Street Journal.

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