Definition and Example of Chapter 7 Bankruptcy
Chapter 7 is the most common type of bankruptcy filing in the U.S. The trustee takes control of assets you own and sells them according to bankruptcy laws and rules to raise money to pay off your debts.
You might have a second car that you don't use to get to work. Owning it is a luxury. There's no loan against it, and it's worth $6,000. The trustee will sell it and apportion that money among your creditors.
Filing for Chapter 7 bankruptcy can help you get a "clean slate" in your financial life, but it will stay on your credit report for 10 years.
- Alternate names: straight bankruptcy, liquidation bankruptcy
How Chapter 7 Bankruptcy Works
Creditors must submit proper claims to receive payment toward your debts, and the trustee can't take and sell all that you own. You're permitted to keep certain "exempt property" so you won't be stripped of everything you need to live. You have a foothold to get a fresh start.
Exemptions apply to certain types of property. The federal government offers a list of exemptions, and many states have their own lists. Debtors are required to use their state's list in some of these jurisdictions. Other states allow them to choose between their own list and the federal list, in which case debtors can elect the set of exemptions that's more beneficial to them.
Common exemptions include:
- Certain retirement accounts
- Property that's necessary for earning a living
Retirement plan exemptions are available to everyone, even if they must accept their state's list, and their state doesn't provide an exemption for those accounts.
Many Chapter 7 cases are considered to be "no asset" cases. There's little or nothing left for the trustee to sell or liquidate after exemptions are applied.
Creditors rarely receive all that they're owed, because most Chapter 7 bankruptcy estates don't have enough funds left to cover all debts after accounting for exempt property. These unpaid balances are "discharged" so the debtor no longer owes that money.
Chapter 7 vs. Chapter 11 Bankruptcy
There are several types of bankruptcy filings. It's important to choose the best option for you and for your future financial situation. Consider the key differences between Chapter 7 and Chapter 11 bankruptcy.
|Chapter 7 Bankruptcy||Chapter 11 Bankruptcy|
|Known as "liquidation" or "straight" bankruptcy||Known as "reorganization" or "rehabilitation" bankruptcy|
|More often used by individuals to help repay debts||More often used by businesses to help repay debts while continuing operations|
|Process generally takes four to six months||Process can last years|
Requirements for Filing Chapter 7 Bankruptcy
Gather all of your financial records, such as bank statements, credit card statements, loan documents, and paystubs. You'll need this information to complete the petition, schedules, statement of financial affairs, and other documents that you must submit to the court. You can download copies of these documents for free from the U.S. Courts website.
Chapter 7 documents include a voluntary petition for relief, schedules of assets and liabilities, declarations regarding debtor education, and a statement of financial affairs. They include listings of all of your property, debts, creditors, income, expenses, and property transfers.
You or your attorney will file everything with the clerk of your local bankruptcy court. You must pay a filing fee.
You can visit the federal court locator page, choose "Bankruptcy" under "Court Type," and add your location in the bottom box to find your local court.
Almost every individual debtor who wants to file a Chapter 7 case must participate in a session with an approved credit counselor before the case can be filed. The session can be attended in person, online, or by telephone. The U.S. Department of Justice provides an interactive search tool on its website to help you find approved credit counselors in your area.
The rationale behind this requirement is that some potential bankruptcy filers don't know that they have other options. A credit counselor might be able to suggest alternatives that could keep you out of bankruptcy court.
Most debtors will also have to take a course in financial management before they can receive a discharge. This class is often given by the same entity you use for credit counseling. Plan to spend about two hours in person, online, or on the telephone in each class.
The Means Test
Debtors must also pass the "means test" calculation, another document that must be completed when you file. This test was added to the Bankruptcy Code in 2005. It calculates whether you're able to afford (or have the "means") to pay at least a portion of your debts.
The means test compares your household income with the median income for your state. It then compares your expenses to IRS local standards as to what people typically pay for similar expenses in your area.
You can only file a Chapter 7 bankruptcy under very specialized exceptions if you fail the means test. Your alternative would be to file a Chapter 13 repayment plan case instead. The means test calculation requires completing and submitting Official Form 122A-2 with the bankruptcy court.
The Meeting of Creditors
The court will issue notice of a debtor's "meeting of creditors" when a Chapter 7 bankruptcy is filed. This is often referred to as the "341 meeting" after the bankruptcy code number that provides for it. The notice is sent to all of the creditors that are listed in your bankruptcy documents.
Any creditor can appear at the meeting and ask the debtor questions about their bankruptcy and their finances. The most common creditors that typically appear are auto lenders that want to know what you intend to do about your car payment if you have one.
Bankruptcy court judges aren't permitted to attend the meeting of creditors. This rule is intended to ensure that they remain impartial.
The bankruptcy trustee will ask the debtor various questions at this meeting as well, such as whether all information in the bankruptcy documents is true and correct. They'll determine that the debtor understands all of the ramifications of filing for bankruptcy and receiving a discharge.
The trustee might continue the meeting of creditors on a future date if they want to investigate certain aspects of the bankruptcy further.
The Debtor's Discharge
The bankruptcy court will automatically grant a discharge if the trustee and the creditors don't object on supportable grounds. The last day to file a complaint objecting to a debtor's discharge is 60 days after the meeting of creditors, or after the date of the first meeting if it's continued and carried over to another date or dates. The discharge is usually entered several days later if no complaint is filed. It prevents creditors from attempting to collect any debt against you personally if you incurred it before the filing date of your bankruptcy petition.
Some debts aren't dischargeable, including certain taxes and child support or spousal support obligations. They'll survive the Chapter 7 proceedings, and you'll still owe them.
A creditor can also still collect on a discharged debt from a co-debtor if someone signed on the loan or debt with you and they didn't also file for bankruptcy.
- Chapter 7 bankruptcy eliminates most debts through the liquidation of assets. It's the most common type of bankruptcy filing in the U.S.
- You're permitted to keep certain "exempt property" so you're not stripped of everything you need to live.
- People who file for Chapter 7 bankruptcy must receive credit counseling, pass a means test, and attend a meeting of creditors.
- The bankruptcy court will automatically grant a discharge if the trustee and the creditors don't object on supportable grounds.
Experian. "When Is a Chapter 7 Bankruptcy Deleted?"
U.S. Courts. "Chapter 7 - Bankruptcy Basics."
National Consumer Law Center. "Increase of Federal Bankruptcy Exemptions, Other Dollar Amounts: April 1, 2019."
U.S. Courts. "Chapter 7 – Bankruptcy Basics."
United States Department of Justice. "Means Testing."