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Chapter 7 Bankruptcy – What Is it and How Does it Work?

8 min read
Philip Ahn, Attorney

by Philip Ahn, Attorney

Chapter 7 bankruptcy is the most common form of bankruptcy in the U.S. That is because it can erase a sizable amount of unsecured debt and give you a fresh start. However, before filing bankruptcy, it can help to know what it is and how it works. 

Also known as “straight bankruptcy,” Chapter 7 is a legal procedure wherein a person with debts that they can’t pay can have much of it removed or reduced. The process involves filing for bankruptcy, having a trustee assigned to your case, selling assets or property to repay debts, and the discharge of your unsecured debts.

If you are thinking about bankruptcy and are unsure if it’s right for you, it can help to consult with a bankruptcy lawyer to discuss your case. 

What is the Purpose of Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is designed for individuals and businesses that have accrued too much debt and don’t have sufficient income to pay it all back. It is used to discharge unsecured debts such as medical bills, credit card debts, and unsecured personal loans. Debts are typically discharged four to six months after the bankruptcy process begins. 

Since it is a “liquidation bankruptcy,” you can expect most of your assets to be sold to pay off debt. You can keep up to $1,000 in cash per person ($2,000 per married couple) and what is allowable via property exemptions. After debts are discharged, they do not have to be paid. 

Steps to File Chapter 7

If you are thinking about filing bankruptcy, we have provided a brief overview of the steps you will need to take below. 

Analyze Your Debt

Chapter 7 bankruptcy is specifically for unsecured debts. Examples of unsecured debt include medical bills, credit card bills, personal loans, etc. While many debts can be discharged, others like spousal support, child support, and student loans are non-dischargeable. Also, most tax debts can’t be discharged. 

Understanding what types of debt you can discharge will help you decide if Chapter 7 is the right option for you. 

Know Your Property Exemptions

There are bankruptcy exemption laws in every state. In some cases, you can use the federal exemption standard when it is more favorable than your state’s. Exemption laws declare the type of property you can keep when filing a Chapter 7. You are entitled to keep a limited amount of equity in certain types of property. 

Generally, you can keep furniture, retirement funds, some equity in your home, automobile, etc. However, you should speak with a bankruptcy lawyer before filing to learn more about what property is exempt. 

Confirm You Are Eligible – Chapter 7 Bankruptcy Means Test

Everyone is not eligible to file Chapter 7. To qualify, you must pass a “means test” that examines your financial statements, income, debt, and expenses to determine if your disposable income is below your state’s median level. It’s important to note that this means test “median level” varies depending on the state where you live. 

If you are not eligible for Chapter 7, you may qualify for Chapter 13. 

Reaffirm, Redeem, or Surrender Pledged Property

If you used an asset for collateral on a loan, you are required to continue paying the creditor per the terms of the original contract if you want to keep the property. When filing Chapter 7, you have the option to:

  • Redeem the Property – Pay your creditor a lump sum of the current replacement value of the property
  • Reaffirm the Property – Continue paying the creditor under the original terms
  • Surrender the Property – Allow the creditor to take it 

Depending on the state where you live, other options may be available to help you keep property such as your home or car. 

Fill Out Bankruptcy Forms

Chapter 7 bankruptcy forms are usually simple and easy to fill out. However, they do require detailed information about debts, expenses, disposable income, creditors, property, assets, etc. You are also required to disclose all property transactions occurring in the past decade. 

Take a Credit Counseling Course

Before a bankruptcy court discharges your debts, they require you to complete a credit counseling course. Most states require this to be completed before filing for bankruptcy. However, in rare cases, individuals can be allowed to complete the course shortly after filing. 

File Forms

Your case doesn’t officially begin until you file your petition. That application includes forms, schedules, copies, information, etc. Many people file all of their forms simultaneously, but you can also do an emergency filing. In that case, you must file the rest of the documents within 14 days of an emergency bankruptcy petition. 

Pay Filing Fee

You are required to pay the filing fee when you file your petition with the court. Fees for Chapter 7 are $335. If you cannot pay all of it upfront, you can ask to make multiple payments (up to four) until it’s paid. If you can’t pay any part of the fee, you can apply for fee waivers, but you must provide the court with proof that you meet eligibility requirements. 

What Happens After Filing Chapter 7? 

After you file Chapter 7, an “automatic stay” is issued. It temporarily stops most debt collection activities such as calls, letters, repossessions, and foreclosures. It also stops wage garnishment. Any property or income that you acquire after filing is not part of the bankruptcy process. 

The court appoints a trustee to examine your finances (debts, expenses, assets, etc.) and to sell property used to pay back all or some of your debts. Shortly after you file, you will have a “creditors hearing” typically run by the trustee. That meeting takes place in court, so you will be sworn in and asked questions about your bankruptcy filing. 

In many cases, the creditor’s meeting is the only time a person filing bankruptcy is required to go to court. 

How Long is the Process for Chapter 7?

Chapter 7 is the fastest type of bankruptcy. You can expect the process to conclude within four to six months after you begin. In some cases, individuals receive a discharge in as little as 60 days. The exact time frame depends on the complexity of your filing and your ability to provide the court with proper forms, documents, and information. 

In contrast, Chapter 13 can take as long as seven years to receive a discharge. 

What is the Maximum Income to File Chapter 7?

Every state has a different median income. With this in mind, if you are in the lower 50 percent of your state’s income, then you are automatically qualified to file for Chapter 7. If your income is in the top 50 percent, you will need to provide additional information that proves you do not have enough disposable income to make payments. 

Do You Have to Pay Back Chapter 7 Bankruptcy?

If you meet the income requirements for Chapter 7, it clears most types of unsecured debt without requiring that you pay back creditors. You must still pay back other kinds of debt, like student loans, child support, etc. 

In total, there are 19 categories of non-dischargeable debt. If you have many non-dischargeable debts, it will help to speak with your lawyer about filing a Chapter 13 to reorganize your debt. 

What is the Average Cost to File Chapter 7?

The filing fee is not the only expense associated with Chapter 7. Many individuals opt to hire a bankruptcy lawyer. Lawyers’ fees range from $1,200 to more than $3,500. In most cases, they will not start working on your case until they are paid in full. 

Generally, you do not have to pay your unsecured debts within a few months before filing bankruptcy. Many filers use the money they save to pay for an attorney. 

Do I Need a Lawyer to File Bankruptcy?

Chapter 7 is called a “straight bankruptcy” for a reason. It is relatively straightforward, and simple for most people. The majority of Chapter 7 cases won’t involve significant assets. So they are easier to handle without the aid of a lawyer. 

While it’s possible to file without an attorney, it’s not typically recommended. Bankruptcy lawyers offer many benefits like:

  • Information about complicated bankruptcy laws and exemptions
  • Help determine which Chapter of bankruptcy is best for you
  • Help keeping your house or car
  • Mistake-free paperwork 
  • Communicating on your behalf with the court, your creditors, and the trustee
  • Ensuring you avoid mistake-generated fraud by carefully reviewing your information 

If you are confident that you can handle the bankruptcy process alone, you may be okay going it alone. However, if you want to ensure a quick and painless process, hiring a bankruptcy lawyer may be in your best interest. 

Our Lawyers Offer Affordable Bankruptcy Solutions – Contact Us 

Many people can’t pay high upfront fees all at once. With us, you don’t have to worry about that. Our network of bankruptcy lawyers offers affordable pay-as-you-go services so you can start the bankruptcy process as soon as possible. 

Additionally, our attorneys offer virtual consultations to begin working on your case from the comfort and safety of your home. 

Before you agree to pay thousands in upfront fees and potentially delay your bankruptcy, get instantly connected with an Unbundled bankruptcy lawyer who can assist you with the process today.

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