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What Is Chapter 7 Bankruptcy & When Should I File?

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In a Nutshell

Chapter 7 bankruptcy is a common legal process to clear your debt, but it’s not right for everyone. One good question to ask yourself if you’re considering Chapter 7 bankruptcy: Do I have more debt than I’ll ever be able to pay back, given my current income and property? If the answer is "yes," then Chapter 7 bankruptcy may be the right option.

Written by Kristin Turner, Harvard Law GradLegally reviewed by Attorney Andrea Wimmer
Updated May 21, 2024


Should You File for Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a powerful legal tool you can use to totally erase many debts and get a financial fresh start. Chapter 7 can wipe out credit card debt, medical debt, car loans, payday loans, and even some federal student loan debt

Experts estimate that over 39 million Americans have filed for bankruptcy. Between March 2023 and March 2024, nearly 272,000 people filed Chapter 7, and over 447,000 people filed for other chapters of personal bankruptcy (Chapter 11, Chapter 12, and Chapter 13). 

The bottom line: Bankruptcy is your legal right, and it’s more common than most people think. 

What Is Chapter 7? How Does It Work?

At its core, Chapter 7 bankruptcy is a legal process that allows you to eliminate certain debts you can’t repay. To file, you fill out several bankruptcy forms. These forms tell the bankruptcy court what you earn, spend, own, and owe. You’ll also submit recent tax returns and pay stubs if you’re employed.

A bankruptcy trustee then reviews your forms and documents. They'll hold your 341 meeting of creditors, where they’ll ask you basic questions about your financial situation.

You’re also required to take two courses: a credit counseling course and financial management course.

After a few months, the court will mail you a notice of your bankruptcy discharge. This signifies that your case was successful and your eligible debts were eliminated. 

The success rate for Chapter 7 bankruptcy is high. As long as you fill out your forms honestly and completely and you follow all the required steps, the court will likely accept your bankruptcy petition and agree to erase your debts.

Who Qualifies for Chapter 7 Bankruptcy? Should I File?

There’s a difference between who’s allowed to file bankruptcy and who should file. 

Most people who earn less than the median income for their state, based on their household size, are eligible for Chapter 7. That’s because they pass the means test set out by the bankruptcy laws. The means test looks at your average monthly income over the last six months. 

If you don’t have a job or earn near the minimum wage, you will likely qualify for Chapter 7 bankruptcy. If you don't pass the means test, you can file Chapter 13 bankruptcy but not Chapter 7. (More on this below.) 

Folks looking for a fresh start typically fall into one of three categories. Those who should:

  • File for Chapter 7 bankruptcy right now

  • Wait a little bit of time and then file for Chapter 7 bankruptcy

  • Not file for Chapter 7 bankruptcy

Should I File Chapter 7 Bankruptcy Right Now?

Infographic explaining the major factors to consider regarding the timing of filing Chapter 7 bankruptcy.

Chapter 7 bankruptcy: Do I have more debt than I’ll ever be able to pay back, given my current income and property? If the answer is "yes," then Chapter 7 bankruptcy may be the right option. 

Some signs that you may be a good fit for filing bankruptcy now:

  • You have more than $10,000 of dischargeable debt

  • Your credit score is already low (below 600).

  • You don’t own expensive property. 

  • You can’t make ends meet each month and keep up with your debt payments.

  • You’re worried about wage garnishment or being sued for your debt

  • You pass the means test. 

  • You don’t have hope or a plan to pay back your debt over the next five years.

If these apply, right now may be the right time to file for bankruptcy. If you aren’t sure, you can always schedule a free appointment with an accredited nonprofit credit counselor. These financial pros can help you explore all your debt relief options and decide if bankruptcy is right for you right now.

Who Should Wait To File Chapter 7 Bankruptcy?

When it comes to filing Chapter 7, timing matters. If any of the following situations apply to you, it may be best to wait on filing your case.

  • If you're still using credit cards to make ends meet or you've made large purchases in the last six months, most bankruptcy pros will advise you to wait to file your case.

  • If you’ve paid back or transferred property to a family member or friend in the last year, it’s also best to wait to file, if you can. You have to disclose these activities in your bankruptcy paperwork and your trustee will ask you about them.

  • If you're suing someone or planning to sue someone, then it’s best to hold off on filing bankruptcy until you know the final outcome of that case, if possible. People often delay Chapter 7 bankruptcy if they’re expecting a personal injury settlement. 

  • Also, if you owe your landlord money and you don't plan to move, try to catch up on missed rent payments before filing. The same generally goes for car loans, if you want to keep the car.

  • Finally, if you expect your financial situation to get worse, then you may want to delay your filing. You can only file Chapter 7 bankruptcy once in an eight-year period, so you don’t want to file if you know that you’re going to fall into more debt.

Again, a free consultation with a credit counselor can help you sort out your options and timing. If you want bankruptcy-specific help, you can also schedule a free consultation with a qualified bankruptcy attorney.

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What Debt Can Be Erased in Chapter 7? 

Two column blue, white, and red infographic showing which debts can and can't be erased by filing bankruptcy.

Chapter 7 bankruptcy can erase the following common debts, known as dischargeable debts:

The moment you file bankruptcy, the automatic stay goes into effect. This temporarily stops anyone from collecting any debts you owe them. 

What Debt Can't Be Erased in Chapter 7?

Chapter 7 bankruptcy can't erase some types of debt, including child support and alimony and recent tax debts or other debts you owe the government like fines. These debts are known as non-dischargeable debts

You should also be aware of how secured debts work in Chapter 7. A secured debt is any debt that is backed by collateral. The two most common secured debts are home mortgages and car loans. 

If you want to keep the property that’s securing a debt, you'll have to continue paying on the debt. Before you file, you must also make sure you’re current on your debt payments. If you’re willing to give up the property, then Chapter 7 bankruptcy can erase the debt.

Can I Keep My Property if I File Chapter 7 Bankruptcy? 

In 95% of Chapter 7 bankruptcy cases, people are able to keep all of their property. That’s because the property is protected by exemptions, which are listed in the Bankruptcy Code (the laws governing the bankruptcy process). 

Exemptions cover all kinds of property, including cash, clothes, furniture, most cars, and household goods up to a certain dollar amount. That amount is called an exemption limit. Exemption limits vary by state. 

Many states also have wildcard exemptions that you can use to protect any property under a specified amount. If your state permits it and you choose to use the federal bankruptcy exemptions, you can protect up to $1,475 with the wildcard exemption, plus an additional $13,950 if you don't use the homestead exemption.

If your property value exceeds the exemption limit that applies, the trustee may seize the property and sell it to pay back your creditors. This is why people call Chapter 7 a liquidation bankruptcy, although any liquidation rarely takes place. 

Property that isn’t protected by exemptions is considered nonexempt property. The most common forms of nonexempt property are expensive cars and homes.

Should I File Chapter 7 or Chapter 13 Bankruptcy?

Chapter 7 is the most commonly filed personal bankruptcy. It’s quicker and less complicated than Chapter 13. That said, Chapter 13 might be a better option for you if you make too much income to pass the means test and/or if you own a home.

There are a few differences between Chapter 7 and Chapter 13 to consider. 

  • Timeline: Chapter 7 takes 4–6 months on average, and Chapter 13 takes 3–5 years. 

  • Repayment requirements: Chapter 13 filers must follow a repayment plan to repay at least a portion of their debts. If you stick with the payment plan for the allotted time, the remaining eligible debt will then be discharged. There is no payment plan in Chapter 7.

  • Expenses: Chapter 13 tends to cost more, overall, than Chapter 7 since it often requires professional legal help and lasts longer.

  • Success rate: Chapter 7 has a very high success rate. Since Chapter 13 is more complicated and takes longer, the success rate is much lower.

If you’re not sure if Chapter 7 or Chapter 13 is better for you, you can schedule a free consultation with a qualified bankruptcy lawyer to gain insight into your specific case. While you can successfully file Chapter 7 on your own without a lawyer, most Chapter 13 cases are only successful with the help of an attorney.

How Do You File Chapter 7 Bankruptcy?

Filing Chapter 7 bankruptcy involves collecting information about yourself (your income, your expenses, what you own, and who you owe) and using it to fill out your bankruptcy forms

Check out Upsolve's 10-Step Guide on How To File Bankruptcy for Free to learn more about how to prepare for and file a Chapter 7 bankruptcy case.

How Long Does Chapter 7 Bankruptcy Take?

Most people can file their bankruptcy forms within one week if they’re organized. The 341 meeting with the trustee who oversees your case takes place about 1–2 months after you file. 

If all goes well, 2–3 months after your meeting with your trustee, you’ll get a letter in the mail that your debt is officially discharged. This means that Chapter 7 bankruptcy from filing to the discharge of your debts takes about 4–6 months.

How Much Does Chapter 7 Bankruptcy Cost?

The bankruptcy court is a federal court and requires a $338 filing fee. If you earn below 150% of the Federal Poverty Line, you may qualify for a fee waiver. If you’re unemployed or on Social Security, you’ll usually qualify for a fee waiver. You can pay the fee in installments if you make a request and the court agrees.

The two online education courses each cost between $10 and $50, depending on the credit counseling agency you choose. You can also apply for a fee waiver for these courses.

If you hire an attorney, the most expensive cost in bankruptcy is your attorney fee. It costs an average of $1,500 to hire a bankruptcy attorney for a Chapter 7 case. Luckily, you don’t need to hire a lawyer to file a Chapter 7 case successfully. See if you’re eligible to use Upsolve’s free tool to file your case.

What’s Life After Bankruptcy Like?

Most people who file Chapter 7 bankruptcy feel a sense of relief that all of their credit card and medical debt is totally gone. It surprises many people to learn that filers who had a credit score under 600 often see their credit score rise after filing.

Chapter 7 bankruptcy stays on your credit report for 10 years, but many people who file see their credit improve and are able to get approved for a mortgage within a few years if they make good financial decisions post-bankruptcy.

The bankruptcy process also creates a new sense of confidence for many people. People who file Chapter 7 usually get more serious about budgeting, saving, and rebuilding their credit, using tools like credit builder loans and secured credit cards. 

What Are the Best Bankruptcy Alternatives?

Bankruptcy isn’t the only way to get the fresh start you need. You have several debt relief options to help you take control of your debt and improve your financial situation.

The most common debt relief tools are:

  • Debt settlement

  • Debt management plans (DMPs)

  • Debt consolidation

A chart showing different options for debt relief by debt type.

Let's go over each option.

What Is Debt Settlement?

You can negotiate with your creditors. If you've fallen behind on payments or are about to, you can contact your creditor to discuss the issue. You may be able to work out an affordable payment plan or negotiate a debt settlement for less than the full amount owed. 

This is especially true with credit card debt. Typically, a settlement needs to be paid in a lump sum.

What Is a Debt Management Plan?

Entering into a debt management plan with a nonprofit credit counseling agency is another option. Unlike in debt settlement, a debt management plan involves paying back your debt over 3–5 years. 

The credit counselor will negotiate a lower interest rate and try to have late fees waived. You’ll just make one payment each month to the counselor who administers the plan. Typically only unsecured debts can be included in a debt management plan.

What Is Debt Consolidation?

Taking out a debt consolidation loan to pay off your debts is another debt relief option. You would then have only one monthly payment to make to the new creditor. These loans often offer lower interest rates than what you're already paying.

Let's Summarize...

Whether you should file for Chapter 7 or another type of bankruptcy depends on the amount of debt you have, your financial situation, and what other debt relief options you can use. It's also important to consider the timing of filing. Taking a credit counseling course or getting a free evaluation from a bankruptcy attorney are great starting places to learn more about your options.



Written By:

Kristin Turner, Harvard Law Grad

LinkedIn

Kristin is a recipient of Harvard Law School’s Public Welfare Foundation A2J Tech Fellowship. At Harvard Law, she served as a member of the Harvard Defenders, the Women’s Law Association, and the Harvard Law Negotiation Review. She was the 2016 – 2017 president of the Harvard Bla... read more about Kristin Turner, Harvard Law Grad

Attorney Andrea Wimmer

TwitterLinkedIn

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 as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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