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A Chapter 7 bankruptcy is a type of bankruptcy that can quickly clear away debts. It's also called a liquidation bankruptcy because you will have to sell nonexempt possessions or assets to repay your creditors. Another name for it is a straight bankruptcy because there are no drawn-out repayment plans. Although it's often a last resort, understanding how a Chapter 7 bankruptcy might help you could be important if you're struggling with debt.
How Does Chapter 7 Bankruptcy Work?
If you're behind on your bills and are struggling to make ends meet, Chapter 7 might help you reset your finances and start anew. It can discharge certain debts—you don't need to pay them anymore—and many people have "no-asset" cases, meaning they get to keep all their belongings.
At a high level, here's how a Chapter 7 bankruptcy works once you file for bankruptcy:
- The court automatically places a temporary stay on your debts. The stay can stop debt collection efforts, home foreclosure, wage garnishment, property repossession, eviction and utility turn-off.
- The court-appointed trustee takes and sells certain property. The trustee reviews your finances and oversees your Chapter 7 bankruptcy. They can sell certain property the bankruptcy won't let you keep (nonexempt property) and use the proceeds to repay your creditors. This might include vehicles, homes, jewelry, collectibles and money in your bank account. The trustee will pay off unsecured debts that aren't dischargeable first—called priority unsecured claims.
- You can keep exempt property. You won't lose everything. But the list of property you don't have to sell (exempt property), and the total value that you can exempt, varies by state. Some states let you choose between their exemption list and the federal exemptions.
- The court discharges remaining debts. The court discharges the remaining debt that's included in your bankruptcy.
Some types of debt generally aren't dischargeable through a Chapter 7 bankruptcy, including child support, alimony, court fees and some tax debts. You also often can't discharge student loans through bankruptcy, although a process change in November 2022 might make it easier.
What's the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
Chapter 7 and Chapter 13 are the two common types of bankruptcy available to individuals. Either could help when you don't have the means to pay all your bills, but there are important differences between the two.
- Chapter 7 bankruptcy: It can wipe out certain debts within several months, but a court-appointed trustee can sell your nonexempt property to pay your creditors. You must have a low income to qualify.
- Chapter 13 bankruptcy: You can keep your assets and get on a more affordable repayment plan with your creditors that usually lasts three to five years. When the plan ends, the remainder of your included debt is discharged. However, you need enough income to afford the payments and be below the maximum total debt limits—currently, a combined (secured and unsecured debts) limit of $2.75 million.
|Chapter 7 vs. Chapter 13 Bankruptcy
|Type of bankruptcy
|Who can file?
|Individuals and business entities
|Individuals only (including sole proprietors)
|Disposable income must be low enough to pass the Chapter 7 means test
|Cannot have more than $2.75 million of combined unsecured and secured debt (for June 21, 2022, through June 21, 2024)
|How long does it take to receive a discharge?
|Typically four to six months
|Upon completion of all plan payments (usually three to five years)
|What happens to property in bankruptcy?
|Trustee can sell all nonexempt property to pay creditors
|Debtors keep all property but must pay unsecured creditors an amount equal to value of nonexempt assets
|Allows removing unsecured junior liens from real property through lien stripping?
|Yes (if requirements are satisfied)
|Allows reducing the principal loan balance on secured debts through a loan cramdown?
|Yes (if requirements are satisfied)
|Allows debtors to quickly discharge most debts and get a fresh start
|Allows debtors to keep their property and catch up on missed mortgage, car and nondischargeable priority debt payments
|Trustee can sell nonexempt property; Chapter 7 does not provide a way to catch up on missed payments to avoid foreclosure or repossession
|Must make monthly payments to the trustee for three to five years; may have to pay back a portion of general unsecured debts
Who Qualifies for Chapter 7 Bankruptcy?
There are a few requirements you'll need to meet to file for a Chapter 7 bankruptcy:
- Credit counseling: You generally must complete an individual or group credit counseling course from an approved credit counseling agency within 180 days before filing.
- Income limits: Either the average of your monthly income during the previous six months must be less than the median income for the same-sized household in your state or you must pass a means test. A bankruptcy means test determines if your disposable income is high enough to make partial payments to unsecured creditors. If you don't pass the means test, you may still be able to file a Chapter 13 bankruptcy.
- No recent bankruptcies: You can't have filed a Chapter 13 bankruptcy during the past six years or a Chapter 7 bankruptcy during the past eight years. If you tried to file a Chapter 7 or 13 bankruptcy and your case was dismissed, you have to wait at least 181 days before trying again.
- No fraud: You may be eligible to file, but a court could dismiss your case if it determines you're trying to defraud your creditors. For example, if you take out a loan or use credit cards with the intent of then declaring bankruptcy to avoid repaying the debt.
What Debts Are Discharged in Chapter 7 Bankruptcy?
A Chapter 7 bankruptcy will generally discharge unsecured debts, including credit card debt, unsecured personal loans, medical bills and payday loans. The court discharges all of these remaining eligible debts at the end of the bankruptcy process, generally about four to six months after you start.
Some types of unsecured debts usually aren't discharged through a Chapter 7 bankruptcy, including:
- Child support
- Student loans
- Some tax debt
- Homeowners association fees
- Court fees and penalties
- Personal injury debts you owe due to an accident while you were intoxicated
- Unsecured debts that you intentionally left off your filing
Your creditor could also object and keep certain debts from getting discharged. For example, a credit card company could object to the debt from recent luxury goods purchases or cash advances, and the court may decide you still need to repay this portion of the credit card's balance.
As a result, the creditor might be able to foreclose on or repossess your property unless you continue to make payments as agreed (reaffirming the debt) or buy it outright (redeem the property). Restrictions can apply to secured debts in a Chapter 7 bankruptcy, and it may be best to consult a bankruptcy attorney to discuss your options.
What Is Exempt vs. Nonexempt Property in Chapter 7?
If you file for Chapter 7 bankruptcy, there's a distinction between property that the trustee can sell (nonexempt property) and property that it can't (exempt property). When you file, you'll list your property and its value. You won't be left with nothing as you can choose to keep exempt property up to the value limit for that category.
Exempt Property in Chapter 7
There are different state and federal exemption limits. Some states require you to use the state's limits—Nolo maintains a list of exemption amounts by state. Others let you choose between the state or federal limits.
For April 1, 2022, to March 31, 2025, the federal exemption limits are:
- A homestead exemption of $27,900
- Up to $4,450 on a vehicle
- Up to $14,875 in personal property, such as books, household items and clothes (there's a $700 per-item limit)
- Up to $1,875 in jewelry
- Up to $2,800 for tools of trade
- Funds in tax-exempt retirement accounts, such as a 401(k) or 403(b) accounts. If you have more than $1,512,350 in traditional and Roth IRAs, the excess amount in those accounts could be nonexempt
- Alimony and child support
- Certain insurance benefits, such as up to $27,900 in personal injury claims
- Public benefits, such as Social Security, veterans benefits, crime victims compensation and unemployment
- An additional amount in wildcard exemptions: $1,475 in property of your choice, plus up to $13,950 of unused funds from your homestead exemption
You can double these amounts if you're married and file a joint tax return. And a trustee can't take property when its value is less than the exempt amount. If it does, you may still receive the exempt amount back.
Nonexempt Property in Chapter 7
Nonexempt property could include any property with a value that exceeds the exemption limits, such as:
- Family heirlooms
- Expensive vehicles
- Antiques or valuable artwork
- Luxury clothing and accessories
- Investments that aren't in retirement accounts
- Musical instruments and electronics that you don't need for work
You may also be able to keep some assets even if their value exceeds the exemption limit.
For example, if you have a ring that's worth $2,500 but you're using the federal exemption limit of $1,875 for jewelry, there's a $625 difference. You may be able to cover that using a portion of your wildcard exemptions.
In some cases, you also might be able to buy nonexempt property back from the trustee. However, you need to use money that's not part of your bankruptcy, such as earnings from after you file or money that you borrow from a friend or family member.
How to File for Chapter 7 Bankruptcy
You can choose to file for Chapter 7 bankruptcy on your own or hire an attorney to help. Some legal aid centers and nonprofit credit counseling agencies may also be able to offer you free assistance. Once you determine that you're eligible, the process will be largely the same:
- Attend counseling. It starts with an individual or group credit counseling course from an approved credit counseling agency, which may take place online or over the phone. You must do this within 180 days of filing, although there are sometimes exceptions during emergencies or if there aren't enough approved agencies offering the service.
- File your forms. On your bankruptcy forms, you'll list your property, exemptions, creditors, income, recent transactions and other financial information. If you have secured debts, you'll need to decide whether you want to pay off the debt, continue making payments or surrender the property to the creditor. There's a fee to file the forms, although you can also request a fee waiver based on your income.
- Send verification documents to the trustee. Once the court accepts your filing, you'll need to send documents to the bankruptcy trustee, who will verify your bankruptcy forms. These could include recent bank statements, tax returns, paychecks and business documents.
- Attend the creditor meeting. Meet with the trustee to answer questions about your paperwork and situation. This meeting is often brief, and your creditors may choose not to attend.
- Attend budget counseling. Within 60 days of the creditor meeting, you must complete a second course from a counseling agency. Don't forget to submit your certificate of completion to the court, or the court may close your case.
- Wait for the discharge notice. Once the court receives your certificate of completion, and often within 60 to 75 days of the creditor meeting, it can discharge your debts. During this time, you might have to give the trustee your nonexempt property, but don't sell or give anything to anyone else unless you have the trustee's permission.
Chapter 7 Bankruptcy and Your Credit
A Chapter 7 bankruptcy record stays on your credit reports for up to 10 years from the filing date, and a completed Chapter 13 bankruptcy remains on your credit report for seven years from the filing date. The bankruptcy might hurt your credit for years, although that doesn't necessarily make it a bad idea—it could be your best financial move.
You may want to closely monitor your credit reports after you file to ensure the included debts are correctly reported as discharged once you complete the bankruptcy process. You can get a free copy of each of your credit reports at AnnualCreditReport.com. Experian also offers a free credit report and credit report monitoring, along with a FICO® Score☉ based on your Experian report.