How Chapter 7 Bankruptcy Works in 2024

Chapter 7 is a quick way to get out of debt for those who qualify for a discharge. Learn whether you can erase your bills and keep your property by filing for Chapter 7 bankruptcy.

By , Attorney · University of the Pacific McGeorge School of Law

Everyone has a hard time making ends meet occasionally, but if you've tightened your belt and are still struggling, Chapter 7 might be the answer. You'll be free of credit card debt, utility balances, medical bills, and more in three to four months. And, if you're like many, you'll be able to keep most, if not all, of your property. Sounds good, right? Start by answering these questions:

  • Will Chapter 7 bankruptcy work for me?
  • Will I be able to erase debt and keep my property?
  • Will I qualify for Chapter 7?
  • What will happen after I file for Chapter 7?

The information below will help. Once you've learned about Chapter 7 bankruptcy, check out the resources provided at the end of the article. You'll find links to applicable bankruptcy forms and additional articles we think you'll enjoy.

Will Chapter 7 Bankruptcy Work for Me?

If it feels like you're the only one struggling financially, it's not the case. The people who file for Chapter 7 are often in similar financial spots. Do any of these situations sound familiar? If not, you might want to learn about filing for Chapter 13.

The remainder of the article dives deeper into Chapter 7. Watch for Colton, Josephine, Hannah, and Matthew. They'll help explain each topic.

Can I Erase My Bills in Chapter 7 Bankruptcy?

Filing for bankruptcy won't make sense unless you can eliminate enough debt to make it worthwhile. So, the first step? Check whether you have dischargeable debts. You'll be in good shape if most of your debt falls into these categories because you can erase these bills in Chapter 7:

  • credit card balances
  • medical bills
  • personal loans
  • gym memberships
  • back rent
  • money owed on a lease
  • payday loans
  • utility bills, and
  • mortgages and car loans (but you'll have to return the home or car to the lender).

Some debts don't go away. For instance, spousal and child support arrearages, newer tax debt, and student loans are nondischargeable debts that don't get wiped out in Chapter 7. You'll pay them after your Chapter 7 ends.

Can I Keep My Car, House, and Other Property in Chapter 7 Bankruptcy?

Everyone needs belongings to start fresh, so don't worry about losing everything. It won't happen. But what you'll get to keep varies widely depending on where you live.

Each state has laws that list property bankruptcy filers can "exempt" (protect). Whether you can use a state's exemptions depends on how long you've lived there. In Chapter 7, if you can't protect an asset with an exemption, you'll lose it. The bankruptcy trustee, the official overseeing your case, will sell the property and disperse the proceeds to your creditors.

If you want to keep a financed home, car, or other secured property, you'll need to be able to protect your equity with an exemption and be current on the payments. Otherwise, the lender will take the property using its lien rights. Filing for Chapter 13 can help you overcome this problem.

You'll find your state's bankruptcy exemptions here. Links to individual states are at the bottom of the article. If your state isn't there, check Nolo's state bankruptcy exemption articles.

TIP: Losing property in Chapter 7 isn't always a bad thing. After the trustee auctions off your property, the first debts paid are often the same debts you'd owe after bankruptcy. So, while you might lose something, you could owe less on your taxes or support obligations after your case is over.

Do I Qualify for Chapter 7 Bankruptcy?

You don't need a particular amount of debt to file, but it should be enough to justify having a bankruptcy on your credit report for up to ten years. At least $10,000 or more is a good rule of thumb.

However, you'll have to show that you don't make too much to qualify. You'll have two chances to pass because it's a two-step process. The first step is relatively simple, but the second step isn't quite so easy, so hopefully, you'll qualify after the first portion.

Here's what you'll do for the first part of the "means test":

  • Add all household income earned during the entire six months before filing (use gross amounts).
  • Divide the total by six and multiply it by 12.
  • Compare your gross family income amount to the chart on the U.S. Trustee Program website (select "Means Testing Information," click the most recent date under "Data Required for Completing the 122A Forms and the 122C Forms," and "Median Family Income Based on State/Territory and Family Size.")
  • You'll pass if your gross family income doesn't exceed the amount listed for your family size.

If you don't pass, you'll figure in your expenses. Look at the means test calculation form to know what you can deduct. But try not to get overwhelmed. It's not easy for anyone to decipher.

Just one more thing. You'll have a few more hurdles to meet. Previous bankruptcy filings, how long you've lived in the state, where your property is located, and if you have extra money to pay into a Chapter 13 plan will also come into play.

What to Do (and Not to Do) Before Filing for Bankruptcy

If you have time to plan your bankruptcy filing, take advantage of it. For instance, you'll want to have a bank account that's in good standing, a place to live, and, if possible, reliable transportation. These three things can be challenging for a year or two after bankruptcy.

Also, did you realize it's a good idea to stop using credit cards before filing? A creditor could accuse you of fraud if you incur debt without intending to repay it. But exceptions exist.

How to File for Bankruptcy

You'll start the bankruptcy process by filing the bankruptcy "petition" with the bankruptcy court. Most Chapter 7 bankruptcy petitions are about 50-55 pages long, and it takes some work to complete them. You'll include information about your assets and debts, income and expenses, and previous financial transactions (you'll find a Chapter 7 bankruptcy document checklist here). All individual filers must take a counseling course and file the completion certificate.

Filing your paperwork isn't free (but the bankruptcy forms are, and you'll find the bankruptcy form list here). If you can afford the filing fee, you'll pay it when you submit your packet. Otherwise, you can apply for a fee waiver or ask the court for permission to pay in four installment payments. Learn more about preparing to file for bankruptcy.

What Will Happen After Filing for Bankruptcy (The Bankruptcy Process)

Shortly after filing your bankruptcy petition, the court will mail a notice to you and your creditors that will include the following information:

  • the bankruptcy filing number and date
  • the automatic stay order notifying creditors to stop collections
  • the meeting of creditors date, and
  • other filing deadlines.

The automatic stay stops most creditors from trying to collect from you, so the collection calls, letters, wage garnishments, and even collection lawsuits should quickly halt. But it doesn't stop all actions.

The meeting of creditors is the one event all filers must attend. You'll turn over financial documents for the trustee's review beforehand. The trustee will check your identification at the meeting and ask questions about your filing. Creditors can appear and ask questions, too, but they rarely do.

The last thing you'll need to do is take the debtor education course and file the certificate. Once all the steps are complete, it's a matter of waiting for your bankruptcy discharge, the order that wipes out your debts. Most bankruptcy cases close shortly after that. The average case takes three to four months to complete. Learn more about the Chapter 7 bankruptcy process.

What Happens After My Bankruptcy Case?

You'll begin rebuilding your credit. You might be surprised to learn that many people are offered credit cards soon after filing. Accept an unsecured card with the highest limit available if you can handle a credit card responsibly. Your credit score will increase if you keep the balance low or fully paid.

Knowing how Chapter 7 bankruptcy works is essential because once you file a Chapter 7 case, you can't dismiss it on a whim, even if you make a mistake. A judge will decide whether moving the case forward will be in the best interest of your creditors. But in almost all cases, selling your property will be best for your creditors.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

Downloadable Copies of Bankruptcy Forms

Chapter 7 and 13 Bankruptcy Forms

Chapter 7 Bankruptcy Document Checklist

More You Might Like

What Debts Can I Erase in Bankruptcy?

What Property Can I Keep When I File For Bankruptcy?

Can I Keep My House If I File for Chapter 7 Bankruptcy?

What Happens in Bankruptcy If I Am on the Deed to Someone Else's Home?

How to File Bankruptcy Without Losing a Car

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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