Chapter 7 bankruptcy is the fastest and most common form of bankruptcy. Also called liquidation bankruptcy, it erases most unsecured debts, like medical bills, credit card debt and personal loans, under the protection of a federal court.
You may have to give up property, but most people don’t. Bankruptcy exemptions, which vary by state, can protect belongings, including some or all of the equity in your home.
“The law protects many assets and most people keep everything in bankruptcy,” Ashley F. Morgan, a bankruptcy and debt attorney in Northern Virginia, said in an email.
Not all debts can be erased, though. Back taxes, court judgments, alimony, child support and student loans generally aren’t eligible.
How to qualify for Chapter 7 bankruptcy
To qualify for Chapter 7 bankruptcy you:
Must pass the means test, which looks at your income, assets and expenses.
Can't have completed a Chapter 7 bankruptcy in the past eight years or a Chapter 13 bankruptcy in the past six years.
Can't have filed a bankruptcy petition (Chapter 7 or 13) in the previous 180 days that was dismissed because you failed to appear in court or comply with court orders, or you voluntarily dismissed your own filing because creditors sought court relief to recover property they had a lien on.
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How to file Chapter 7 bankruptcy
You can probably complete the Chapter 7 process within six months. You'll have to follow several steps.
Credit counseling: You must complete prefile bankruptcy counseling from a qualified nonprofit credit counseling agency within 180 days before filing.
Find an attorney: This is important, but not mandatory. Missing or improperly completed paperwork can lead to your case being thrown out or not having some debts dismissed.
File paperwork: Your attorney will help with filing your petition and other paperwork. But you have to gather all relevant documentation of your assets, income and debts. At this point, most creditors can no longer sue you, garnish your wages or contact you for payment.
Trustee takes over: Once your petition is filed, a court-appointed bankruptcy trustee will begin managing the process.
Meeting of creditors: The trustee will arrange a meeting between you, your lawyer and your creditors. You’ll have to answer questions from the trustee and creditors about your bankruptcy forms and finances.
Eligibility: After reviewing your paperwork, the trustee will confirm whether you’re eligible for Chapter 7.
Nonexempt property handled: The trustee determines whether assets that aren’t exempt are worth selling so proceeds can go to creditors. Nonexempt property can be jewelry or the equity in your house or car if it’s higher than your state’s exemption limit. The majority of individual Chapter 7 cases, however, are “no asset” cases where there are no nonexempt items to liquidate.
Secured debts: To resolve your secured debts, the property held as collateral may be ordered returned to the creditor. Or you may be able to redeem the collateral (you pay the creditor what it’s worth now) or reaffirm the debt (arrange to exclude the debt from bankruptcy and continue to pay it back).
Education course: Before your case is discharged, you’ll have to take a financial education course from a qualified nonprofit credit counseling agency.
Discharge: Four to six months after filing your petition, your case will be discharged, meaning that eligible debts are forgiven. Shortly thereafter your case will be closed.
Chapter 7 vs. Chapter 13 bankruptcy
Make sure you understand the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 makes sense when:
You don’t have many assets.
Your problem debts total more than 50% of your annual income.
Your problem debts can be discharged, or forgiven, by Chapter 7. These include debts like medical bills, credit card debt and personal or payday loans.
It would take five years or more to pay off your debt, even if you took extreme measures.
Use our debt calculator to total your debt
Some debts typically can’t be erased in bankruptcy, including recent taxes, child support and student loans. That said, bankruptcy still may be an option for you if erasing other balances would free up enough money to pay the debts you have to keep.
If you have more assets or secured debts and can repay some or all of what you owe, Chapter 13 bankruptcy might be more appropriate. Under Chapter 13, you complete a repayment plan.
» Before bankruptcy: Explore other debt relief options, such as a debt management plan
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Rebuilding after bankruptcy
Going through bankruptcy isn’t easy, but resolving many debts can put you in position to rebuild your credit and your financial life.
Chapter 7 can stay on your credit report for 10 years and make qualifying for credit harder. To rebuild after bankruptcy, consider:
Making a financial plan: Build a budget, create financial goals and consider enlisting the free help of a nonprofit credit counselor to help you along the way.
Strengthening your credit: Make all payments on time, keep your credit balances low and dispute mistakes on your credit reports.
