How Chapter 7 Bankruptcy Works in 2021

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.

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. In three to four months, you'll be free of credit card debt, utility balances, medical bills, and more. 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. Also, try using the ten-question bankruptcy quiz to spot potential issues quickly—it will flag areas you'll want to look into further.

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 or compare the differences between Chapters 7 and 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 get rid of enough debt to make it worth your while. 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—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 give the home or car back 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 get a fresh start, 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'll be able to use a state's exemptions will depend on how long you've lived in the state. In Chapter 7, if you can't protect an asset with an exemption, you'll lose it. The bankruptcy trustee—the official tasked with 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 not only need to be able to protect your equity with an exemption, but you'll have to 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 end up owing less on your taxes or support obligation 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—not so much, 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. If you want to know what you'll be able to deduct, take a look at the means test calculation form. 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. Getting these three things can be challenging for a year or two after bankruptcy.

Also, did you realize that 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 a bit of 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—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 come to a quick 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. At the meeting, the trustee will check your identification and asks 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 thereafter. 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're ready to handle a credit card responsibly. If you keep the balance as low or fully paid, your credit score will go up.

Knowing how Chapter 7 bankruptcy works is essential—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.

Need More Help?

We want you to find the information you need. For more easy-to-understand bankruptcy articles, go to TheBankruptcySite or consider buying a self-help book like How to File Chapter 7 Bankruptcy by Attorney Cara O'Neill and Albin Renauer J.D.

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 consulting with a local bankruptcy lawyer.

Talk to a Bankruptcy Lawyer

Need professional help? Start here.

How it Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you
Get Professional Help

Get debt relief now.

We've helped 205 clients find attorneys today.

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you