Chapter 7 is the individual bankruptcy filing most Americans choose. It is a liquidation: a court-appointed trustee takes the debtor's nonexempt property, sells it, and pays the proceeds to creditors. In return, most leftover unsecured debts are erased in a discharge. The bargain has a price. A filer must surrender assets beyond what the law shields, and not every debtor is allowed to file.
How a Liquidation Case Unfolds
A case opens when the debtor files a petition in a United States Bankruptcy Court. The filing sets off an automatic stay under 11 U.S.C. § 362, halting most collection actions, lawsuits, wage garnishments, foreclosures, and repossessions for as long as the case lasts. The court appoints a trustee to examine the filing, question the debtor under oath at a meeting of creditors, and liquidate nonexempt property for creditors. When nothing nonexempt exists, the matter is a no-asset case and creditors recover nothing from the estate.
Passing the Means Test
Chapter 7 is not open to everyone. Under 11 U.S.C. § 707(b), a debtor whose income tops certain thresholds may be presumed to be abusing the system and steered toward Chapter 13. The means test measures the debtor's average monthly income across the prior six months against the median income for a household of the same size in the state, then subtracts permitted expenses. Debtors below the median normally qualify. Those above it can still qualify through allowable deductions or by showing special circumstances. The U.S. Courts website at uscourts.gov posts current median income figures by state and household size.
What Exemptions Protect
Filing does not mean losing everything. Exemptions shield a certain amount of equity in a home, a vehicle, household goods, tools of the trade, retirement accounts, and other property. Some states let a filer choose between the federal exemptions listed in 11 U.S.C. § 522 and the state's own list, while others require the state set and bar the federal one. Both the protected amounts and the covered property vary sharply between states. The same assets can be entirely protected in one state and partially exposed in another.
Which Debts Are Discharged
A Chapter 7 discharge wipes out most unsecured debts, including credit card balances, medical bills, personal loans, and older utility bills. Some obligations survive. Under 11 U.S.C. § 523, these typically cover most federal and state taxes, student loans unless repayment would create an undue hardship, child support and alimony, fines and restitution, debts obtained by fraud, and liabilities from willful and malicious injury or from driving while intoxicated. Secured debts behave differently. A debtor who wants to keep a car or house must keep paying, and may sign a reaffirmation agreement that revives the debt after the case closes.
The Filing Process, Step by Step
- Finish a credit counseling course from an approved provider within 180 days before filing, as 11 U.S.C. § 109(h) requires.
- File the petition, schedules of assets and debts, and required statements with the bankruptcy court.
- Attend the meeting of creditors, often called the 341 meeting, where the trustee and creditors may pose questions under oath.
- Surrender nonexempt property to the trustee or pay its value, and complete a debtor education course.
- Receive a discharge, usually about three to four months after filing when nothing complicates the case.
Chapter 7 Versus Chapter 13
| Feature | Chapter 7 | Chapter 13 |
|---|---|---|
| Purpose | Liquidation of nonexempt assets | Reorganization through a payment plan |
| Who qualifies | Debtors who pass the means test or fall under the median income | Individuals with regular income and debts under statutory ceilings |
| Property | Nonexempt assets may be sold | Debtor usually keeps property and pays through a plan |
| Duration | Usually a few months | Three to five years |
| Best suited for | Limited income, few assets, mostly unsecured debt | Regular income, a home in arrears, debts that cannot be discharged in Chapter 7 |
The Legal Framework
Chapter 7 lives in the Bankruptcy Code, Title 11 of the United States Code, at 11 U.S.C. §§ 701 to 784. The Federal Rules of Bankruptcy Procedure supply procedure, and individual courts add local rules and forms. States define most property exemptions, and the protected amounts shift over time. Official forms and current figures are at uscourts.gov, and the Legal Information Institute at law.cornell.edu offers free access to the statutory text. Bankruptcy is federal, so the process looks similar nationwide, but exemptions and practical outcomes lean heavily on state law.
When Chapter 7 Falls Short
Some situations call for a different chapter. A debtor with substantial nonexempt equity in a home or a valuable vehicle may lose it. Someone behind on a mortgage who wants to keep the house may do better in Chapter 13, where arrears can be repaid over time. A debtor whose obligations are mostly nondischargeable, such as recent taxes or domestic support, gains little from filing. And a debtor expecting an inheritance, a tax refund, or a personal injury settlement during the case may watch that money go to creditors instead.
Life After the Discharge
A discharge is a fresh start, though it does not erase the public record. The bankruptcy stays on the credit report for the period the law allows and can influence borrowing, renting, and some hiring decisions. Rebuilding takes patience and consistent habits: paying current bills on time, keeping balances low, and disputing errors on the credit report. Certain debts, such as a reaffirmed car loan, outlive the case and must be paid to keep the property.
Timing Rules That Matter
A debtor cannot get a Chapter 7 discharge if a prior Chapter 7 discharge came within the previous eight years, under 11 U.S.C. § 727(a)(8). A prior Chapter 13 discharge creates a shorter waiting period. Federal law also caps how long a bankruptcy may appear on a credit report. Under the Fair Credit Reporting Act at 15 U.S.C. § 1681c, a Chapter 7 case generally may be reported for ten years and a Chapter 13 case for seven years. These rules shape the timing of a filing, so review them before committing to a course of action.
This guide is general information, not legal advice. Bankruptcy turns on specific facts, and property exemptions vary by state. A bankruptcy attorney or a court-approved legal aid program can advise you on your situation.