When you don’t have enough income to pay your monthly bills, Chapter 7 bankruptcy can help you quickly eliminate qualifying debt. And you won’t lose everything you own. If eligible for Chapter 7 bankruptcy, you can keep the property you need for your fresh start and wipe out qualifying debt.
Should I File for Chapter 7 Bankruptcy?
Filing for bankruptcy is a big step, and most people don’t want to file unless there’s no other option. Reviewing some of the basics of Chapter 7 bankruptcy can help you decide whether it's the right choice.
- Your income meets discharge qualifications. For a household of your size to be eligible for a Chapter 7 discharge, your income must be below your state's median income. You can determine whether you are qualified by taking the “means test,” which analyzes your income after allowing you to subtract certain deductions (more below).
- You’re broke after paying monthly living expenses. Even if you pass the means test, you won’t qualify if you have money left over at the end of the month (disposable income). The court assumes that people can use disposable income to pay creditors and, when disposable income exists, will convert the case to a Chapter 13 bankruptcy.
- You don’t own much property. In Chapter 7 bankruptcy, you can keep or “exempt” the property you’ll need to maintain a modest home and job. The bankruptcy trustee appointed to your case will sell any additional “nonexempt” property and distribute the proceeds to your creditors. You can check your state’s exemption laws to find out how much exempt property you’re entitled to keep.
- You can keep up your house or car payment or let the property return to the bank. As long as you’re current on your house or car payment—or any other secured debt that allows the creditor to take back the property if you fail to pay—and you can continue making the payment after filing for Chapter 7, you can keep the property. However, if you’re behind on a secured debt before you file for Chapter 7 bankruptcy, you stand to lose it. The creditor can ask the court to lift the “automatic stay”—the order that prevents creditors from collecting from you during bankruptcy—and, if successful, proceed with a foreclosure or repossession.
- Your debts qualify for discharge. Not all debts get wiped out or “discharged” in bankruptcy. Certain debts—such as recent income taxes, family support obligations, and student loans—stick around until you pay them off (more below). If you have this type of nondischargeable debt, you’ll want to consider Chapter 13 before filing for bankruptcy. By contrast, if your debt consists of collection accounts, outstanding credit card balances, medical bills, personal loans, unsecured judgments, and overdue utility bills, then you’re in luck. Chapter 7 bankruptcy discharges those debts.
Just because you can qualify for Chapter 7 doesn’t mean it’s best for you. Your particular obligations create a unique financial picture. Here are some examples of situations that don’t call for Chapter 7:
- You want to stay in a house in foreclosure. Chapter 7 bankruptcy won’t help you because it doesn’t have a mechanism to help you catch up on payments. The better choice might be to bring your mortgage current over time using a Chapter 13 repayment plan. The same applies if you’re behind on a car payment and want to avoid repossession.
- You owe recent taxes, domestic support, or some other nondischargeable debt. Chapter 7 won’t eliminate nondischargeable obligations, so your creditors can still collect after the case is over. By contrast, Chapter 13 bankruptcy will let you pay off these debts over three to five years. You won’t need to worry about debt collectors beating at the door during that time.
- Your income is too high to qualify for a Chapter 7 discharge. If you make too much to pass the means test, you must file for Chapter 13 for bankruptcy relief.
Will I Qualify for a Chapter 7 Discharge?
Under the Chapter 7 means test, if your average gross income for the six months before filing is less than your state's median income, you automatically qualify. If your income exceeds the median, you might still be eligible because the second step of the test allows you to deduct certain expenses, such as income taxes, health care premiums, and childcare costs, from your gross income.
To find your state’s median income, visit the U.S. Trustee website. In the box titled “Data Required for Completing the 122A Forms and the 122C Forms,” select the most recent date. Click the “Median Family Income Based on State/Territory and Family Size” link to access the median income chart.
Will I Get to Keep My Property?
Yes—at least some of it. The amount you can keep, or “exempt,” depends on your state’s exemption laws. Most states allow you to protect essential household goods, such as kitchenware, furniture, bedding, an inexpensive car, and some jewelry. Other types of exempt property include:
- your residence
- retirement funds, such as 401k accounts
- Social Security, veteran’s benefits, and disability benefits, and
- trade or professional tools.
But what happens if you don’t want to give up your property? There is a solution: You can buy it from the bankruptcy trustee—and usually at a discount.
Many people keep all their possessions because they don’t own any nonexempt items. However, those who own a mix of exempt and nonexempt items will find that the latter will become part of their “bankruptcy estate,” which the trustee will sell to benefit their creditors. Common types of nonexempt property include:
- homes with more equity than can be exempted (the exempt amount will be returned to you)
- timeshares and rental property
- boats, recreational vehicles, and motorcycles
- artwork and collectibles
- non-retirement investment accounts, and
- stock or other ownership interests in a business, LLC, or corporation.
Of course, most people don’t want to lose any property, including nonexempt things. But from a practical standpoint, losing a treasured but nonexempt item can make sense if the total amount of debt wiped out is significantly greater than the value of that item.
Example. Henry had $80,000 in credit card debt and could exempt all his property except a classic 1964 Austin-Healey valued at $7,800. Harry filed for bankruptcy because even after relinquishing the car, he still netted $72,200 in debt savings.
But what happens if you don’t want to give up your property? There is a solution: You can buy it from the bankruptcy trustee—and usually at a discount. Sometimes, the trustee will even let you pay for it in installments.
Example. Even though Henry knew filing for bankruptcy was right, the Austin-Healey was the first car he bought. He couldn't bear to part with it after keeping it in pristine condition for years. He didn’t have to. The trustee didn’t care who bought the Austin-Healy as long as the bankruptcy estate received the sale proceeds. So he deducted 20%—the amount it would cost the trustee to sell the car—and sold it to Henry for $6,240. On top of that, the trustee gave Henry ten months to pay for it.
Will All of My Debts Get Wiped Out?
Chapter 7 bankruptcy wipes out almost all unsecured, nonpriority debts, including credit card debt, medical bills, personal loans, many lawsuit judgments, income taxes over three years old (though not always), and past-due utility bills. Not all debts get discharged, however. For instance, you’ll remain responsible for the following:
- secured debt (a mortgage or car payment) if you keep the property
- priority unsecured debt (most income taxes, delinquent family support payments, and penalties and fines owed to the government), and
- student loans.
To learn more about the debt that survives bankruptcy, see Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.
What Happens After Filing?
A bankruptcy case starts when the debtor files official paperwork (the petition and schedules) disclosing income, property, debts, and prior transactions. Here’s what will happen next.
- The automatic stay order will stop collection activity. As soon as you file, the court automatically issues an order called a “stay.” Once the automatic stay is in place, your creditors cannot contact or attempt to collect from you. The calls come to a halt.
- You’ll provide documents and answer questions at a hearing. About one month after you file, you’ll go to the 341 Meeting of Creditors—the one court appearance you must attend. Seven days beforehand, you must give the trustee a large group of documents called 521 documents. At the 341 meeting, you’ll present identification, and the trustee will ask you a series of questions about your petition answers. Creditors can attend but rarely show up, and most meetings last less than five minutes.
- You’ll file your post-filing course certificate. In your Chapter 7 case, you’ll complete two courses—one before you file and one afterward. The second course is called the debtor education course.
- You’ll receive your discharge. The court will mail your discharge notice 60 days after your 341 meeting. If your case is a “no asset” case—meaning your creditors get nothing—the court will close your case shortly after that. A no-asset case typically takes three to four months. By comparison, asset cases remain open until all assets are distributed, which can take several months or more, depending on the case's complexity. For example, the trustee might have to wait for a buyer to purchase a hard-to-sell piece of property or for your attorney to settle a bad-faith lawsuit against your insurance company.
Find out how much filers spend hiring a Chapter 7 lawyer in How Much Does It Cost to File Chapter 7 Bankruptcy.
Reopening a Chapter 7 Bankruptcy Case
Most cases proceed through the Chapter 7 bankruptcy process without a hitch. But that’s not always the case. You might not realize that you’ve made a mistake until after the court closes the matter.
If you find yourself in this situation—perhaps because you forgot to file a necessary document or didn’t realize a creditor could still get paid unless you filed a particular motion—there’s a solution. You can ask the court to reopen your case and give you time to fix the problem.
Be aware that someone else can also request the reopening of your case, such as for failing to disclose a valuable asset in your bankruptcy paperwork. In this article, you’ll learn more about unfinished business that can resurface in bankruptcy court.
Reopening a Chapter 7 Case to File an Educational Course Certificate
Some mistakes occur more frequently than others—and forgetting to file a required course certificate is at the top of the list. Here’s what happens (and how to fix it).
When you file for bankruptcy, you’re required to take two educational courses. The first is a credit counseling course—commonly called the “first course” or “pre-bankruptcy filing” course—that you’ll complete before filing for bankruptcy. The second is a financial management course taken after filing. It’s often called the “debtor education” class, the “second course,” or the “post-bankruptcy filing” course.
Most people file the first certificate along with the other official forms (bankruptcy petition and schedules) needed to start a case (but not always). Although it’s possible to forget to file the first certificate, the problem usually doesn't start there. The second course—the debtor education requirement taken after filing for bankruptcy—tends to be at the root of most closure problems.
The issue arises because, after filing, it’s easy to focus on other things and forget about the requirements. The problem is that the time to file the certificate of completion is limited. It’s due no later than 60 days after the date set for the 341 meeting of creditors (the hearing all bankruptcy filers must attend). If you don’t file it on time, the court will dismiss the case without issuing a discharge (although the court will send a notice reminding you about the requirement beforehand).
Other Reasons to Reopen a Chapter 7 Case
Other things can also happen after your bankruptcy case's closure. For example, you might need to do one of the following:
- pay the filing fee (the court will dismiss your case if you ask to make installment payments but fail to pay them)
- amend a schedule to include a forgotten debt, or
- ask the court to set aside a lien (a property interest that allows a creditor to take property to repay a debt).
You’ll follow the reopening procedure discussed below.
How to Reopen a Chapter 7 Case
If the court dismisses your matter because you forgot to file your certificate, all is not lost. You can ask the court to open it and give you additional time to file official Form 423 Certification About a Financial Management Course (the form you use to tell the court that you completed the class).
You can do this by filing a motion explaining why the court closed your case prematurely. Additionally, you’ll ask the court to reopen the case so that you can fix the error by filing proof that you completed your debtor education course. If the court grants the motion, you’ll file two additional motions: one requesting permission for extra time to file Form 423 and another asking the court to enter the discharge that wipes out your dischargeable debt. The court will likely grant your requests without setting a hearing, but reopening your case will cost you—you’ll have to pay the filing fee again.
The procedure is more complicated when your request could negatively affect others. The court must allow the affected party to argue against the motion. For example, if you ask the court to extinguish a creditor’s lien, the creditor can object to the removal and will win if the creditor has the right to recover the property from you.
Filing motions in bankruptcy court isn’t easy, and you must understand the procedure or how to do it and the consequences before attempting to reopen a case yourself. You should also know that the exact procedure can differ in different courts. For instance, some courts allow you to make all three requests in one motion. If you’re unsure which procedure your local court prefers, you should contact a bankruptcy attorney practicing in your area.
The U.S. Trustee’s Role in Reopening a Chapter 7 Bankruptcy
The U.S. trustee might also want to revisit your matter. Here are a couple of reasons why:
- You neglected to disclose all your assets in your bankruptcy petition and schedules.
- You received an inheritance, life insurance proceeds, or lottery winnings during the 180 days following your bankruptcy filing.
However, the U.S. trustee cannot personally reinstate your case. Instead, the trustee will ask the U.S. Trustee’s office to file a motion asking the court to reopen the case.
If you believe that the property or funds in question should not be liquidated and distributed to creditors, you can oppose the motion on those grounds. A bankruptcy attorney will be in the best position to advise you about your defenses and the strength of your case—especially given that such allegations touch on bankruptcy fraud. Ultimately, the court will decide the appropriateness of the request.