Filing for Chapter 7 Bankruptcy

Chapter 7 bankruptcy can give you a fresh start, but not everyone is eligible.

Written by Ben Luthi / May 13, 2022

Quick Bites

  • Chapter 7 bankruptcy involves liquidating some of your assets to pay off some of your debts, after which the remainder is discharged.
  • Applicants must pass a means test to be eligible for this type of bankruptcy.
  • Chapter 7 can provide you with a fresh start on your finances, but it can also do damage to your credit history.
  • Consult with a credit counselor or an attorney to determine the best path for you.

If your financial situation is dire, Chapter 7 bankruptcy can help you get a clean slate of sorts. Not everyone qualifies to file for this type of bankruptcy, though, and those who do will have some of their assets liquidated and see more damage to their credit history.

What are some of the reasons people consider filing for Chapter 7 bankrutpcy? “There are wide-ranging factors, the most common being job loss or a major medical event that can result in high medical bills and being out of work,” says Ben Pitts, a partner at Pitts, Hay & Hugenschmidt, a debt relief law firm. “Another main reason is not understanding how to use credit and getting yourself into a poor credit report situation.”

If you’re thinking about filing for Chapter 7 bankruptcy, here’s what you need to know.

Inside this article

  1. What is Chapter 7 bankruptcy?
  2. Who’s eligible to file?
  3. Which assets can be liquidated?
  4. The effect on your credit score
  5. Should you file for Chapter 7?
  6. How to file for Chapter 7
  7. Recovering from bankruptcy

What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is a legal proceeding that allows consumers to have some or all of their debts discharged, usually because they can’t afford to keep up with their payments.

Also known as liquidation bankruptcy, Chapter 7 involves selling off some of your assets and using the proceeds to pay down some of your debts. Then, any remaining balances will be forgiven.

Which debts are eligible?

Not all debts are eligible to be included in Chapter 7 bankruptcy. In general, dischargeable debts include:

  • Credit card debt

  • Medical bills

  • Personal loans

  • Payday loans

  • Auto loan deficiencies

  • Utility bills

  • Collection accounts

  • Auto accident claims (unless they involve drunk driving)

  • Civil court judgments (unless they’re based on fraud)

  • Past-due rent

  • Tax penalties and unpaid taxes past a certain number of years

  • Most attorney fees[1]

If your financial situation is in really bad shape, you may also be able to include student loans, but they’re usually difficult to get approved.[2] In some cases, you can also include secured loans, such as an auto loan or mortgage loan, but the lender may reserve the right to foreclose on or repossess the collateral securing the loan.[3]

However, there are certain debts that you can never include in a Chapter 7 filing, including alimony, child support and recent tax and other government debts.[4]

Who’s eligible to file?

If your average income over the past six months is below the median income for your state based on your household size, you’re eligible to file for Chapter 7 bankruptcy. If you don’t meet that requirement, you may still be eligible to file if you pass a means test.[5]

This test is used to determine whether you have enough disposable income to at least make partial payments on your debt. If you don’t pass the test, though, you can still file for Chapter 13 bankruptcy.[6]

Other things that can disqualify you from a Chapter 7 filing include:

  • You’ve filed for Chapter 7 bankruptcy in the past eight years.

  • You’ve filed for Chapter 13 bankruptcy in the past six years.

  • It’s been 180 days or less since your last bankruptcy case was dismissed.

  • The court determines that you’re attempting to defraud your creditors.[5, 7]

Which assets can be liquidated?

The idea of losing some of your assets to pay off some of your debts can be daunting, but fortunately there are some exemptions.

In some states, you can choose between the state’s list of exemptions and the federal government’s list, though other states may not give you that choice.

Common federal exemptions include:

  • Up to $27,900 of equity in your principal residence

  • Up to $4,450 for your motor vehicle

  • Up to $1,875 for jewelry

  • Up to $700 per item (with a $14,875 total value) on household goods, furnishings, appliances, clothes, books, animals, crops and musical instruments

  • Up to $2,800 for tools of the trade, including books and implements

  • Up to $14,875 in loan value, accrued dividends or life insurance policy interest

  • Alimony and child support payments

  • Life insurance payments

  • Social Security benefits, unemployment benefits, veteran’s benefits, public assistance, and disability or illness benefits

  • Employer-sponsored retirement plan funds

  • Up to $1,512,350 in individual retirement account funds[8]

How does Chapter 7 bankruptcy affect my credit?

The Chapter 7 bankruptcy process typically takes four to six months to complete, but the public record can remain on your credit reports for 10 years from the filing date. In contrast, Chapter 13 bankruptcies can take up to five years to be discharged, but they only remain on your credit reports for seven years from the filing date.[9, 10]

In the earlier years, a bankruptcy can make it difficult to obtain credit because lenders question your ability to repay your debts.

Over time, though, you can use new and existing credit accounts to establish a positive payment history, which can help reduce the negative impact of your bankruptcy.

Is Chapter 7 bankruptcy right for you?

There are a lot of different factors you’ll need to consider to determine if filing Chapter 7 bankruptcy is the right choice for you. Some questions to ask yourself include:

Will it discharge enough debt to give me the fresh start I need?

Is my financial situation dire enough that I can pass the median income or means test?

Will I be required to give up property that I want to keep?

Is my credit score already damaged?

Am I willing to accept the long-term consequences of having a bankruptcy on my credit reports?

Are there other options available, such as debt consolidation, a debt management plan or debt settlement?

Before you can file for bankruptcy, you’ll need to complete a credit counseling course with an approved credit counseling agency at least 180 days beforehand.[11] A credit counselor can help you by assessing your situation and providing you with different options to resolve your debt concerns. In some cases, they may recommend another course of action.

You’ll also want to consult with a bankruptcy attorney. While you can technically file on your own, an attorney can help you determine whether Chapter 7 or Chapter 13 is the better option and provide guidance throughout the process.

“There is a lot of misinformation on the web, and researching it on your own can easily lead to misunderstanding,” says Pitts. “If you are considering bankruptcy you should speak with an attorney. Most don’t charge fees for consultations so take advantage and find out if bankruptcy is right for you.”

How to file for Chapter 7 bankruptcy

If you think Chapter 7 bankruptcy is right for you, make sure you get the credit counseling course under your belt before you start the filing process, and consider working with an attorney.

“An attorney can make sure your assets are protected and you are filing everything correctly,” says Pitts.

Once you’re ready, you’ll need to obtain the necessary forms from your local bankruptcy court and fill them out. You’ll provide information about your creditors, debt balances, property, income and other important financial information. You’ll pay a $338 fee when you file your forms with the court.[12]

Once the court has accepted the filing, you’ll need to send recent bank statements, tax returns, pay stubs and other income documents to the court trustee, who will verify them. You’ll then attend a creditor meeting with the trustee, who will ask questions about your situation. This meeting is generally brief, and creditors sometimes don’t show up.[12]

During the next 60 days, you’ll be required to attend a budget counseling course with a credit counseling agency and submit your certificate of completion to the court. After that, you’ll work with the trustee to provide nonexempt property for them to sell and pay off a portion of what you owe. Once that’s done, the court will typically discharge the remaining debt.[12, 13]

Recovering from bankruptcy

After your Chapter 7 bankruptcy has been discharged, you’ll need to take meaningful steps to recover, both from a financial and a credit standpoint. Sign up for a credit monitoring service to get an idea of where you stand and to track your progress going forward.

Your options for credit will be limited, but you may be able to get approved for a secured credit card, a credit-builder loan or a savings-secured loan. Regardless of which option you choose, it’s important to pay on time every month. If you choose to go the credit card route, you’ll also want to keep your balance low relative to its credit limit.

Over time, your positive payment history can help improve your credit score, giving you more options to rebuild and maintain a good credit history. During this process, it’s important to make changes to your money management to avoid repeating the same mistakes that led to the bankruptcy in the first place.

Article Sources
  1. “Which Debts Are Discharged in Chapter 7 Bankruptcy?” NOLO, https://www.nolo.com/legal-encyclopedia/debt-discharged-chapter-7-bankruptcy.html.
  2. “Discharge in Bankruptcy,” Federal Student Aid, https://studentaid.gov/manage-loans/forgiveness-cancellation/bankruptcy.
  3. “Secured Debts in Chapter 7 Bankruptcy: An Overview,” NOLO, https://www.nolo.com/legal-encyclopedia/secured-debts-chapter-7-bankruptcy-an-overview.html.
  4. “What Are Non-Dischargeable Debts in a Bankruptcy Filing?” Upsolve, https://upsolve.org/learn/non-dischargeable-debts-bankruptcy-filing.
  5. “Chapter 7 — Bankruptcy Basics,” United States Courts, https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics.
  6. “The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?” NOLO, https://www.nolo.com/legal-encyclopedia/chapter-7-bankruptcy-means-test-eligibility-29907.html.
  7. “Discharge in Bankruptcy — Bankruptcy Basics,” United States Courts, https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/discharge-bankruptcy-bankruptcy-basics.
  8. “The Federal Bankruptcy Exemptions,” NOLO, https://www.nolo.com/legal-encyclopedia/federal-bankruptcy-exemptions-property.html.
  9. “How Long Does Chapter 7 Bankruptcy Take?” Debt.org, https://www.debt.org/bankruptcy/chapter-7/how-long-does-it-take.
  10. “How Long Does Bankruptcy Stay on Your Credit Report?“ TransUnion, https://www.transunion.com/blog/credit-advice/how-long-does-bankruptcy-stay-on-credit-report.
  11. “Filing for Bankruptcy — What to Know,” Federal Trade Commission, https://consumer.ftc.gov/articles/filing-bankruptcy-what-know.
  12. “How to File for Bankruptcy for Free: A 10-Step Guide,” Upsolve, https://upsolve.org/learn/how-to-file-bankruptcy/#get-your-filing-fee.
  13. “The Pre-Bankruptcy Credit Counseling Requirement,” NOLO, https://www.nolo.com/legal-encyclopedia/the-pre-bankruptcy-credit-counseling-requirement.html.

About the Author

Ben Luthi

Ben Luthi

Ben has been writing about money since 2013. He's been on staff at NerdWallet as a credit card writer and for Student Loan Hero, where he covered student loans and other personal finance topics. Ben's work has appeared in U.S. News, The New York Times, Experian, FICO, Credit Karma, Bankrate and more

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