How to File Chapter 7 Bankruptcy

The decision to file bankruptcy may not feel like an accomplishment worth posting on social media. However, it is certainly a decision that can provide massive debt relief. Although Chapter 7 bankruptcy is typically considered a last resort to reach a debt settlement, this guide will help you determine if it is the right option for you.

Chapter 7 bankruptcy, also known as a “liquidation bankruptcy,” is a legal mechanism designed to pay off unsecured debt by selling nonexempt assets. This type of bankruptcy is considered one of the quickest solutions to clear debt for an individual debtor and business entity. It is highly recommended that you seek professional advice for guidance and confirmation of eligibility. 

What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy involves a liquidation bankruptcy process, where nonexempt possessions are sold to gather funds for repaying creditors. Unlike Chapter 11 and Chapter 13 bankruptcy, which entail financial reorganization and the development of income-driven payment plans, Chapter 7 provides debt relief in as little as four to six months. 

However, businesses must note that filing for Chapter 7 bankruptcy will terminate all business operations—in other words, the business will close. Although this decision may seem daunting, it can offer a fresh new start. 

Here are some key differences between a liquidation bankruptcy and a financial reorganization chapters:

• Chapter 11: A Chapter 11 bankruptcy, also known as a “reorganization, " allows individuals and businesses to create an affordable repayment plan to eliminate debt without selling possessions or terminating the business. There are zero limits to the amount of debt or earned income that is required to qualify.
• Chapter 13: Similar to debt consolidation, this option involves restructuring debt into a three to five year payment plan. However, there are limitations. Only individuals with average earnings and sole proprietors will qualify. It's important to note that the qualifications may vary depending on the state in which the Chapter 13 bankruptcy is filed.

Please note that LegalZoom does not offer assistance with filing for Chapter 7 bankruptcy. However, LegalZoom provides services to assist with filing for Chapter 11 or Chapter 13 bankruptcy.

Core terms related to Chapter 7 bankruptcy

Here are some core terms to keep in mind to provide further assistance:

• Debtor: An individual or business, also known as the borrower, who owes a debt to the lender.
• Creditor: An individual or business, also recognized as the lender, who is in the position to collect a debt. 
• Debtor in possession: This prevents creditors from using the debtor's assets to pay the amount owed. Additionally, business operations are protected from being terminated without the necessity of an appointed bankruptcy trustee.
• Automatic stay: This shields the debtor's finances and property from creditors in an attempt to collect money to settle an outstanding balance.

Eligibility criteria

Before filing for bankruptcy, it is crucial to assess your eligibility to determine which type of bankruptcy best fits your financial needs. The bankruptcy “means test” was designed to provide a simple way to discover if you meet qualifications. 

The means test uses income-based calculations to determine if you have the means to repay outstanding debt. This does not mean that your income must fall below the poverty line. Instead, your income is evaluated based on the median household income within your state. 

Additionally, family size, living expenses, and consumer or non-consumer debt accumulated within the last six months before filing for bankruptcy are also considered. Some examples of monthly living expenses include, but are not limited to, car payments, mortgages, rent, and medical expenses. 

Failing the means test is a common concern for individuals considering bankruptcy. It's important to be aware of the automatic exemptions, such as recent bankruptcies, that can impact your eligibility. If you have previously filed for Chapter 7 bankruptcy, there is an eight-year waiting period before applying for another bankruptcy. This waiting period may vary if you are considering filing for a different type of bankruptcy.

For example, if you have filed for Chapter 7 bankruptcy and now wish to file for Chapter 13, you must wait for four years before doing so. Similarly, if you have previously filed for Chapter 13 and are now exploring Chapter 7, the waiting period will be six years or less, based on the filing date. Understanding these timelines is crucial for making informed decisions.

In extreme cases, committing fraud may lead to a court dismissal. This could result from activities such as deliberately hiding or transferring financial assets and supplying inaccurate information., such as hiding financial assets or providing false information. 

Therefore, it is highly advised to act with integrity during legal proceedings before documents are presented to the bankruptcy judge.

Steps to file Chapter 7 bankruptcy

Here are the steps you'll need to start the Chapter 7 bankruptcy process.

Step 1: Consult a bankruptcy attorney

Hiring a Chapter 7 bankruptcy attorney typically costs between $1,000 and $5,000, a significant investment for individuals navigating financial difficulties. While the price tag may seem substantial, considering every dollar counts during financial hardship, attempting to file for personal bankruptcy alone without legal representation could lead to even greater costs.

Considering the complexity of bankruptcy law, seeking the assistance of a knowledgeable attorney is highly recommended. An experienced attorney can provide valuable insights into navigating the complex filing for bankruptcy process and offer professional guidance to help individuals make informed decisions during this challenging time.

Step 2: Attend pre-filing credit counseling

You are required to undergo credit counseling with a credit counselor within 180 days prior to filing for Chapter 7 bankruptcy to receive a credit counseling certificate. This can be done by phone, in person, or online through an approved credit counseling agency. This educational course lasts 60 to 90 minutes and usually costs between $25 to $50. However, getting a fee waiver is possible with proof of lower income. 

Nevertheless, this course is a positive step forward. It will give you a detailed understanding of your current debt-to-income ratio to create a personalized budget plan that will determine if you should proceed with filing for bankruptcy. You can locate an approved credit counseling organization through the U.S. Trustee Program listed under the U.S. Department of Justice.

Step 3: Prepare documentation

Preparing for a bankruptcy petition involves creating a packet of financial documentation to present in court. This is a crucial step that requires careful attention to detail. Failing to provide accurate financial information can result in serious penalties. Therefore,  professional guidance from a knowledgeable attorney is highly recommended to ensure the bankruptcy petition is thoroughly and accurately prepared. 

Some of the financial records and documentation you should expect to include are the following:

• Bankruptcy chapter filed
• Demographic information (all names used as a form of identification)
• Disclosure of all debt, creditors, exempt and nonexempt assets
• Type of debt (consumer, nonconsumer, or business debt)

Step 4: File the petition and pay fees

When your attorney files the petition with a bankruptcy court in their jurisdiction, it triggers an automatic stay, temporarily halting all collection activities against you. This provides temporary protection from wage garnishments, lawsuits, and demanding phone calls from creditors. 

Filing for Chapter 7 bankruptcy currently costs $338. This fee may change at the time of filing. To get updated information regarding the cost of bankruptcy forms and fees, visit the US Courts Bankruptcy webpage. If you cannot afford the filing fee, you may qualify for a payment plan. However, due to the unique circumstances under Chapter 7, it is possible to get filing fees waived. To qualify for Chapter 7, you must prove that you are unable to make payments to cover your debt.

If approved, the likelihood of receiving a fee waiver is increased. Additionally, the bankruptcy court may waive your filing fee if your current income is 150% below the poverty line or median income within the state. If you are interested in submitting a fee waiver request to the court, simply complete Form 103B.

Step 5: A trustee is appointed

A trustee, as the name suggests, is an individual who is entrusted with the responsibility of thoroughly evaluating all of your assets to establish possible exemptions. In this case, the trustee will liquidate all assets that have been determined as nonexempt property and use the amount gained to pay your unsecured creditors. It is important to note that this service comes at a cost. 

Step 6: Creditors’ meeting and claims

After a detailed assessment, if your trustee concludes that all assets are exempt from liquidation, a "no asset" report will be filed with the court. This will prevent creditors from pursuing claims for certain debts. However, if nonexempt assets can be placed into the bankruptcy estate, profits earned will be distributed to creditors. Within 90 days, creditors are provided the opportunity to file their claims. During this process, a meeting of creditors and private trustees is held to allow creditors to ask questions about your financial status, personal liability, business debts, and future plans.

Step 7: Determination of eligibility

During this step, the bankruptcy trustee and the court will assess whether the debtor meets all the legal requirements to proceed with Chapter 7 and have their debts discharged. To file for Chapter 7 bankruptcy, there isn't a specific debt requirement, but there is an income requirement. You need to complete a "means test" to check your eligibility.

Depending on the state, your average monthly income over the six months before filing must not surpass the median household income. However, family size and living expenses are considered during calculations to demonstrate that you cannot repay your outstanding debt. 

Step 8: Handling nonexempt property

Making the decision to sell your personal property can be a difficult and emotionally charged process. Thankfully, not all of your possessions have to be sold. Your attorney and court-appointed trustee will carefully assess each asset to determine whether it is exempt or nonexempt property, depending on federal exemptions and on the state. Once this assessment is complete, any possessions categorized as "exempt property" from liquidation are for you to keep.

However, the trustee is authorized to sell all nonexempt property in order to generate funds to repay your unsecured creditors. It's important to bear in mind that the ultimate goal is to earn enough profit to settle your debts to your secured creditors and accomplish debt relief.

Step 9: Secured debts and property

Secured debt is a financial obligation that is supported by a specific asset, known as collateral. This collateral serves as a form of protection for the creditors owed the creditor in case of default. If you are unable to make payments, the creditor has the legal right to seize the collateral to recover the outstanding amount. In the event of payment delinquency, you will typically be presented with three options:

Redeem: This option gives you the opportunity to reclaim ownership of your property by paying its current market value instead of the outstanding debt. This means that you only need to cover the secured portion of the loan in order to retain your property. For example, if there's a risk of losing a wedding ring that was initially purchased for $4,000, and you owe $3,000. If it is currently estimated to be worth $2,500, then you would pay that amount.

If there's a disagreement between you and the creditor regarding the current value, the court will intervene and make a decision.

Reaffirm: This option allows you to retain ownership of the property with an agreement of continued payments. This agreement allows for negotiations to take place, with the aim of potentially adjusting the payment terms. This opens up the possibility of finding a more manageable payment structure that aligns with your financial situation.

Surrender: This means that the property will be returned to the lender if you are unable to keep up with payments or purchase at its current value.

Step 10: Attend pre-discharge debtor education course

Once you've filed for Chapter 7 bankruptcy, you'll need to complete a comprehensive financial management course, also known as the debtor education course. This course plays a crucial role in equipping you with the necessary knowledge and skills for building a prosperous financial future, starting with a debt management plan. Similar to the pre-filing credit course, enrolling in a program offered by the US Bankruptcy Trustee-approved agency is mandatory. 

The course can be completed in person, over the phone, or online within 2 hours. While there may be a fee of $10 to $50, rest assured that you can request a fee waiver. During the course, you'll delve into essential topics such as budget planning and effective strategies for managing financial hardships. Your certificate from the course is vital for the court, as it establishes your eligibility.

Step 11: Discharge and closure

Upon completing the process, you will receive a bankruptcy discharge of the remaining dischargeable unsecured debts. This means you are legally released from the obligation to repay some of your unsecured debts or secured debts, offering protection against creditor harassment and potential repossession of your assets. As a result, the bankruptcy court officially closes the case, providing you with relief and a fresh new start.

What debts are discharged in Chapter 7 bankruptcy?

Chapter 7 bankruptcy allows individuals to eliminate certain types of debt, providing a fresh financial start. However, not all debts are dischargeable under Chapter 7 bankruptcy laws.

Dischargeable debts 

• Credit card debt: In most cases, credit card debt is dischargeable unless there is a collateral agreement. For example, if you default on payments for an Ashley Furniture secured credit card, the company can repossess the furniture.
• Medical bills: Medical debt is classified as unsecured, meaning it is not supported by collateral. As a result, it is considered a nonpriority debt that can be discharged.
• Personal loans: A type of loan, commonly referred to as a "friends and family" unsecured loan, is eligible for discharge.
• Utility bills: Debts related to utility services charged before filing for Chapter 7 bankruptcy are dischargeable. However, you will be responsible for all recurring payments for utility services after the bankruptcy is filed.
• Rent arrears: Unpaid rent can be a dischargeable debt unless the landlord requests relief from the automatic stay. As a result, breaking your lease might be a potential solution to explore.
• Money judgments from lawsuits: If the initial debt is eligible for discharge, it is possible to have money judgments pertaining to that debt discharged as well. However, it's important to note that you may have to file a lien avoidance action in the case of a judgment lien.
• Tax debts: typically dischargeable if considered income tax debt, is at least three years old, was honestly filed within two years before filing a Chapter 7 bankruptcy, assessed by the IRS within 240 days before, and there is no record of a tax lien on your assets. 

Non-dischargeable debts 

• Student loans: Generally not dischargeable unless the debtor can prove undue hardship in a separate court proceeding
• Child support and alimony: This is considered a domestic support obligation (DSO), meaning you must pay all child support and alimony debt. However, it is possible to request exemptions or deductions for future child support and alimony payments.
• Recent tax debt: Tax debt must be at least three years old and assessed by the IRS 240 days before filing for Chapter 7 bankruptcy.
• Debts from fraud or malicious acts: In 2023, the US Supreme Court has ensured that all individuals who have incurred debts through fraudulent and malicious activities will be held accountable unless innocence is proven.
• Court fines and penalties: All punishable fines are non-dischargeable.
• Debts from DUI Incidents: Debts from driving under the influence (DUI) cannot be discharged. However, seeking the assistance of a DUI lawyer can potentially help to reduce the total amount owed.  

How much does it cost to file for Chapter 7?

Filing for Chapter 7 bankruptcy is not free. The costs, including court fees, may vary from state to state; however, qualifying for an affordable payment plan or waived fees is possible. 

• Court filing fee: $338
• Administrative fee: $78
• Trustee fee: $15
• Nonprofit credit counseling agencies fee: $10-$50
• Attorney/bankruptcy lawyer fee: $1,000 to $5,000

Chapter 7 benefits and implications

Benefits of filing for Chapter 7

• Quick timeframe
• Fresh financial start
• No three to five year repayment plans
• Debt discharge
• Automatic stays on collections

Implications of filing for Chapter 7

• Hard hit on credit report
• Potential loss of property
• Not all debts are dischargeable
• Becomes public record
• Can impact future employment opportunities

FAQs

How long does the Chapter 7 process take?

A Chapter 7 bankruptcy case typically takes about four to six months to complete, marking this chapter as one of the quickest bankruptcy debt settlement solutions available.

What are some common mistakes made while taking the Bankruptcy Means Test?

Passing the Bankruptcy Means Test is one of the most important steps before filing for Chapter 7. Therefore, avoiding making some of the most common mistakes while completing your "means test" is crucial. Some of these errors include the following:

• Income: Providing inaccurate information regarding your average monthly income and disposable income based on the last 6 months before filing and failing to include all disposable income while filing bankruptcy.
• Household size: Including members of the family who are not financially dependent on you
• Living expenses: Providing exaggerated expenses without proof or documentation.

How long does Chapter 7 bankruptcy affect your credit score?

It will take approximately 10 years from the date of filing to be removed from your credit report. However, it isn’t impossible to improve your credit score beforehand.

Can a Chapter 7 bankruptcy be converted to another chapter?

Yes, this can be done voluntarily or be court-ordered if it has been determined that you meet the eligibility criteria and another chapter will better suit your needs.

How much debt can be discharged in Chapter 7?

No minimum or maximum amount of unsecured or secured debts is required to be discharged.