What is Chapter 7 bankruptcy?

Who can file

Individuals, married couples and businesses can file Chapter 7. Individuals must complete a credit counseling course from an approved agency within 180 days before filing and must pass the means test. The test first compares household income over the previous six months with the median income for a household of the same size in the debtor's state. If income is below the median, the debtor qualifies. If it is above, a second calculation subtracts allowed expenses to see whether enough disposable income remains to repay creditors through Chapter 13 instead. A person cannot receive a Chapter 7 discharge if they received one in a case filed within the previous eight years.

How the process works

1. Filing — the debtor files a petition and detailed schedules of assets, debts, income and expenses, and pays a $338 filing fee (payable in installments or waived for low-income filers).
2. Automatic stay — collection actions, lawsuits, garnishments and most foreclosures stop immediately.
3. Trustee — a trustee is appointed to review the case and collect any non-exempt property.
4. Meeting of creditors — about 20 to 40 days after filing, the debtor answers questions under oath from the trustee; creditors rarely attend.
5. Debtor education — a second course on personal finance must be completed before discharge.
6. Discharge — typically about 60 to 90 days after the meeting, the court issues the discharge, and the case closes soon after.

What you can keep: exemptions

Despite the word “liquidation,” most individual Chapter 7 cases are “no-asset” cases — everything the debtor owns is protected by exemptions and nothing is sold. Exemptions protect a certain amount of equity in a home (the homestead exemption, from a few thousand dollars in some states to unlimited value in Florida and Texas), a vehicle, household goods, clothing, tools of a trade, and most retirement accounts. Some states let debtors choose between the state exemptions and a set of federal exemptions. Property above the exemption limits may be sold by the trustee, with the exempt amount paid to the debtor.

Secured debts

Chapter 7 eliminates personal liability on debts but does not remove valid liens. To keep a house or car with a loan, the debtor must stay current on payments and may sign a reaffirmation agreement for the car loan. Alternatively, the debtor can surrender the property and walk away from the remaining debt, or in some cases redeem a car by paying its current value.

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Debts Chapter 7 does not erase

Child support and alimony, most taxes that are recent, most student loans (unless undue hardship is shown in a separate proceeding), criminal fines and restitution, debts from drunk-driving injuries, and debts incurred through fraud, if the creditor objects successfully.

Effects on credit

A Chapter 7 bankruptcy can remain on credit reports for up to 10 years. Scores often drop sharply at first but many filers begin rebuilding within a year or two, since their debt burden has been removed. Secured credit cards and on-time payments help.

Chapter 7 vs. Chapter 13

Chapter 7 is faster and cheaper and requires no repayment plan, but it does not help catch up on missed mortgage payments or protect non-exempt property. Chapter 13 involves a three- to five-year repayment plan and is often used to save a home from foreclosure or when income is too high for Chapter 7.

Costs and getting help

Beyond the filing fee, attorneys commonly charge roughly $1,000 to $2,500 for a straightforward Chapter 7, usually paid before filing. Many bankruptcy lawyers offer free consultations. Filing without a lawyer is possible but risky: mistakes in the schedules or exemptions can lead to lost property or dismissal.

Common misconceptions

• “I will lose everything.” Most filers keep all their property because of exemptions.
• “Everyone will know.” Bankruptcy is public record, but it is rarely published and employers, neighbors and friends usually never learn of it.
• “I can never get credit again.” Many filers receive credit offers within months of discharge.
• “My spouse has to file too.” One spouse can file alone, though joint debts remain the other spouse's responsibility.