What Is Chapter 7 Bankruptcy and How Do You File?

Get a quick overview of the process and steps involved in a Chapter 7 bankruptcy case.

Chapter 7 bankruptcy is the most popular form of bankruptcy relief for individuals. The basic idea behind Chapter 7 is this: The bankruptcy trustee appointed to your case sells your property to pay off your creditors and ends with a discharge of qualifying debt, such as credit card balances, medical debt, and personal loans.

Most Chapter 7 bankruptcy cases take about four months to complete and move through the process without a hitch, but it’s not for everyone. Find out about some of the differences between Chapter 7 and Chapter 13.

How Filing for Chapter 7 Bankruptcy Works

Even though the trustee's job is to ensure that your creditors get paid as much as possible, many Chapter 7 debtors give up little, if any, property. State and federal laws allow a filer to "exempt" or protect particular property up to a certain dollar amount. If an exemption covers all of the property equity, you get to keep it. Because you're allowed to keep the things you need to work and live, most Chapter 7 filers protect everything they own and don’t lose any property. Find out more information about keeping your property in Chapter 7 and bankruptcy exemptions.

Keeping a House or Car When Filing for Chapter 7 Bankruptcy

If you are current on your loan payments and you can exempt all of the equity, you'll be able to keep the house or car. If, however, you are behind on your loan payments, or you can't protect all of the equity, you will most likely lose it. In that case, Chapter 7 wouldn't be a good option unless you were okay with letting the property go. Here's why.

Mortgages and car loans are secured debts. You agreed that the lender could take the property if you didn't pay. Because of this, you can wipe out the balance in Chapter 7, but the lender will have the right to take the collateral, sell it, and apply the funds to the balance owed if you're behind on the payment. Even if you're current, however, if you can't protect your equity with an exemption, the trustee will sell the property.

Other options include surrendering (giving back) the property, or redeeming (paying the fair market value for) the property. Learn how Chapter 13 can help debtors keep secured property.

Qualifying for a Chapter 7 Bankruptcy Filing

Not everyone is eligible for a Chapter 7 debt discharge. You must take and pass the "means test" to qualify for Chapter 7 bankruptcy. If your income is lower than the state's median income for a family the same size as yours, you automatically pass the means test. If your income is over the state median, you'll get another chance to pass by subtracting your expenses. If you don't have enough left over to make a meaningful payment to your creditors through a three- to five-year Chapter 13 repayment plan, you'll qualify for Chapter 7. Find out which expenses will help you pass the means test.

Keep in mind that even if you qualify, the court will still evaluate whether you have significantly more income than you need to pay your monthly bills. The court will compare the figures on Schedule I: Your Income to those on Schedule J: Your Expenses to determine whether enough remains to make a meaningful payment to creditors.

Example. Suppose you make $5,000 per month, but your monthly budget shows you need only $4,500 per month. The court might order you to pay $500 per month through a Chapter 13 repayment plan, even if you qualify for Chapter 7.

What Happens After You File for Chapter 7 Bankruptcy

Once you know that you qualify for Chapter 7 and that you can keep the property important to you, you'll be ready to file your case. Here's what will happen next.

  1. You'll file the bankruptcy petition. You start the case by submitting a packet of papers (called the "petition") with the court in which you disclose all aspects of your finances, including your income, debt, property, and property transfers going back as many as ten years. You'll also attach a certificate of completion showing that you took credit counseling from an approved agency within the previous six months. In most cases, the course takes a few hours online or by phone. Find out more about the forms you'll need to file for bankruptcy.
  2. The automatic stay will stop creditors. Once you file your bankruptcy petition, an order—called the automatic stay—is put into place if it's your first bankruptcy filing (the stay isn't always available for subsequent bankruptcies). The automatic stay prohibits almost all of your creditors from continuing collection actions. Creditors cannot call you, collect money from you, foreclose on your home, repossess your car, or place a lien on your property. Exceptions to the automatic stay exist, however, and creditors can go into court and ask the judge to lift (remove) the automatic stay.
  3. You'll turn over supporting paperwork. At least five days before the meeting of creditors (more below), you'll send documentation to the trustee (or the court in some jurisdictions) that proves the statements made in your bankruptcy paperwork. You can expect to forward your most recent tax return, along with bank statements, paycheck stubs, and more, depending on the requirements of the trustee assigned to your case.
  4. You'll attend the meeting of creditors. Every filer must attend one meeting of creditors (341 hearing) conducted by the bankruptcy trustee. You can expect the trustee to verify your identity and ask you questions about your petition and finances. Creditors can, but often don't, appear to ask questions.
  5. You'll complete a financial management course. A filer must complete a debtor's education course in addition to the credit counseling received before filing for bankruptcy before receiving a discharge.
  6. The court will issue the bankruptcy discharge. After completing the requirements above, the court will grant a bankruptcy discharge and the automatic stay will end. The discharge will not state which of the filer's debts get wiped out, however. Instead, it will list the types of debt that survive bankruptcy, such as domestic support obligations, recently acquired tax obligations, and student loan debt.
  7. The court will close the case. Shortly after issuing the discharge order, the court will close your case unless the trustee hasn't distributed all nonexempt assets, or if you’re involved in bankruptcy litigation.
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