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What Is Chapter 7 Bankruptcy & 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. Let’s take a look at some bankruptcy basics to help you learn about it and decide whether it's right for you.

Written by Kristin Turner, Harvard Law Grad, Rohan Pavuluri.  Reviewed by Attorney Andrea Wimmer
Updated October 29, 2021


Chapter 7 bankruptcy is a powerful legal tool in the United States that allows you to totally erase many debts, including credit card debt, medical debt, car loans, and payday loans. Experts estimate that over 39 million Americans have filed for bankruptcy.[1] It’s more common than most people think. 

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. 

What Is Chapter 7? How Does It Work?

In a Chapter 7 bankruptcy, you’ll fill out forms about what you earn, spend, own, and owe and submit these forms to the bankruptcy court. You’ll also submit recent tax returns and pay stubs, if you’re employed.

A bankruptcy trustee will review your forms and documents. They'll also hold your 341 Meeting of Creditors, where they’ll ask you basic questions about your financial situation.

A couple of months later, you’ll get a notice in the mail from the court letting you know that the court has granted you a bankruptcy discharge. The vast majority of people who are honest, fully fill out their bankruptcy forms, and complete the required steps get their bankruptcy petition accepted by the court and their eligible debts erased. 

What Debt Can Be Erased? 

Chapter 7 bankruptcy can erase the following common debts:

  • Credit card debt

  • Medical bills 

  • Car loan deficiencies

  • Personal loans and payday loans 

  • Judgments from credit cards and debt collection agencies

  • Utility bills 

These debts are known as “dischargeable” debts. 

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

What Debt Cannot Be Erased?

Chapter 7 bankruptcy cannot erase the following types of debts:

  • Child support and alimony

  • Recent tax debts and other debts you owe the government like fines

  • Student loans can usually not be erased

These debts are known as non-dischargeable debts. 

Secured debts are debts that are connected to a specific property, like a mortgage is connected to a house and a car loan is connected to a specific car. If you want to keep your property that secures 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.[2] The Bankruptcy Code has rules in place called exemptions that allow you to keep several types of property, such as cash, clothes, furniture, cars, etc. up to a certain dollar amount, known as “exemption limits.” 

The specific exemptions you can use to keep your property depend on your state. Many states have wildcard exemptions that allow you to keep any property as long as it’s worth less than a certain amount. For the 19 states that permit the use of the federal bankruptcy exemptions, the wildcard ceiling is a little over $10,000, meaning that you can keep property that adds up to be less than about $10,000.

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.

Who Qualifies for Chapter 7 Bankruptcy? Should I File?

There is a difference between who is allowed to file and who should file. 

Most people who earn under the median income for their state, based on their household size, are able to file. This is because they pass the means test according to bankruptcy laws. The means test takes into account your average monthly income over the last 6 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 a Chapter 13 bankruptcy but not Chapter 7. 

Folks looking for a fresh start typically fall into one of three categories:

  • Those who should file for Chapter 7 bankruptcy right now;

  • Those who should wait a little bit of time and then file for Chapter 7 bankruptcy;

  • Those who should not file for Chapter 7 bankruptcy.

Should I File Chapter 7 Bankruptcy Right Now?

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 

  • Keeping up with payments is making it impossible to make ends meet every month

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

  • You pass the means test because you earn under the median income in your state

  • You don’t see a way of being able to pay back your debt over the next 5 years

If these apply, right now may be the right time to file for bankruptcy.

Who Should Wait To File?

Certain activities can complicate a Chapter 7 bankruptcy and waiting a little bit of time can help. If you're still relying on your credit cards to make ends meet or you've made large purchases in the last 6 months, then it's best to wait to file and pay off your most recent charges first.

If you paid back or transferred property to a family member or friend in the last year, then it’s 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 8 year period, so you don’t want to file if you know that you’re going to fall into more debt.

Chapter 7 vs. Chapter 13 Bankruptcy

The main difference between Chapter 7 and Chapter 13 bankruptcy is that in Chapter 13 bankruptcy, you don't immediately erase any debts. You propose a repayment plan based on your ability to repay certain debts. The bankruptcy trustee and all creditors review the Chapter 13 reorganization plan and, if it’s acceptable to all involved, the court confirms your repayment plan, which lasts three to five years.

Most people file Chapter 13 bankruptcy instead of Chapter 7 for two reasons. First, they fail the means test due to their high income and don’t qualify for Chapter 7 bankruptcy. Second, they own a home they want to keep that’s not covered by the Chapter 7 bankruptcy exemptions. 

If you're considering filing Chapter 13 because you don't pass the means test, look at the reasons you aren't passing. The lookback period for the means test is 6 months, so if you recently experienced a drop in household income, you might qualify for Chapter 7 in the near future.

How To 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 this information to fill out your bankruptcy forms. Whether you plan on filing now or aren't sure yet, 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 one to two months after you file. 

If all goes well, two to three months after your meeting with your trustee, you’ll get a letter in the mail that your debt is officially discharged. This means that that Chapter 7 bankruptcy from beginning to the discharge of your debts takes about 3-5 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. People who are on social security or unemployed 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 qualify for a fee waiver for these courses, based on your income.

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.

What’s Life After Bankruptcy Like? How Long Is Chapter 7 Bankruptcy on Your Credit Report?

Most people who file Chapter 7 bankruptcy feel a sense of relief that all of their credit card and medical debt, along with other dischargeable debt, is totally gone. Many people see their credit scores improve if they had credit scores in the sub-600 range. 

The bankruptcy process often creates a new sense of confidence, where people feel more comfortable with their financial affairs than when they began. Part of the reason is the two required personal finance courses. Chapter 7 bankruptcy also forces you to reflect on your financial situation. 

People who file Chapter 7 bankruptcy usually get more serious about budgeting, saving, and rebuilding their credit, using tools like credit builder loans and secured credit cards. 

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.

Alternatives to Chapter 7 Bankruptcy

Alternatives to bankruptcy may be able to help you get the fresh start you need. The one that's right for you will depend on your financial situation and the types of debts you owe. Let's go over each option.

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.

Repayment Plan: Entering into a debt management plan with an agency is another option. Unlike in debt settlement, a debt management plan involves paying back your debt over time on more doable terms than you have now. Typically only unsecured debts can be included in a debt management plan.

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.

Another option is selling your valuable property to pay back creditors. But be careful. The money you get for your property may not be enough to pay off or settle all of your debts. You may end up having to file for bankruptcy anyway.

Let's Summarize...

Whether you should file for Chapter 7 bankruptcy depends on your financial situation and what other debt relief options are available to you. 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.

For more information on filing bankruptcy, including an overview of the different types of bankruptcy, head on over the Bankruptcy Basics section in our Learning Center.


Sources:

  1. American Bankruptcy Institute. (2019, December). Bankruptcy Grab Bag of Fun Facts. ABI Journal. Retrieved September 14, 2020, from https://www.abi.org/abi-journal/bankruptcy-grab-bag-of-fun-facts
  2. 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

Written By:

Kristin Turner, Harvard Law Grad

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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

Rohan Pavuluri

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Rohan Pavuluri is the CEO and Co-founder of Upsolve, one of America's leading resources helping low-income and working-class families overcome financial distress. He graduated from Harvard College in 2018 and was named to the TIME100 Next list in 2021. He is also a member of the... read more about Rohan Pavuluri

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

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