Chapter 7 bankruptcy: Is it right for me and how to file | finder.com

Chapter 7 bankruptcy

Get a fresh start with this most common form of bankruptcy.

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If you’re overwhelmed by your credit card and loan debt, you may benefit from a Chapter 7 bankruptcy. This bankruptcy allows those with limited income to sell their personal property to pay back creditors — and provide a fresh start on the road to financial health.

How does Chapter 7 bankruptcy work?

Chapter 7 bankruptcy is also called liquidation bankruptcy, because it involves surrendering your nonexempt assets to the court. These assets include your home, newer vehicles, artwork and jewelry. Which of your assets are exempt depends on the state you live in, but retirement pensions and other essential personal belongings are typically safe from seizure.

After you file the claim, your nonexempt assets officially belong to the “estate” — a temporary owner of your property. The court assigns a trustee to your case, an independent contractor who’s in charge of selling off the items in the estate and distributing the proceeds to the creditors you owe money to.

After that, the creditors, trustee and court meet to discuss your claim at a meeting of the creditors. If they all approve your claim, your debts are discharged — or wiped out.

Is Chapter 7 bankruptcy right for me?

If you don’t see your financial situation improving and your debts are primarily unsecured, Chapter 7 bankruptcy may be a way to get a fresh start.

But consider the financial consequences of your decision. An obvious drawback is the hit your credit will take, which can make obtaining future loans and credit difficult. You also risk the loss of substantial assets, and simply filing for bankruptcy can cost $325 or more.

Even so, you may find that the opportunity to rebuild your credit and secure a financially stable future is worth the diligence and hard work.

How to file for Chapter 7 bankruptcy

Filing for Chapter 7 bankruptcy involves a trip to the courthouse, a meeting of creditors and time with your trustee.

  1. Get your financial records in order.
    The court needs to see your financial history together in one place. Include paystubs, credit card statements, loan documents and other creditor information. A representative will review these documents with your creditors when they meet to assess your case.
  2. Complete the bankruptcy paperwork.
    You’ll complete a bankruptcy petition and schedules — or lists of information related to your claim, the creditors you owe money to, your income and your monthly expenses. Other documents may be required to disclose all details of your financial situation to the court.
  3. File your claim.
    Your ducks in a row, it’s time to make the claim official. Find your nearest bankruptcy court and file your claim in person with a clerk. Prepare to pay filing and administrative fees costs of about $335.

Should I hire a lawyer?

There’s no doubt that filing on your own — called pro se or pro per — can save you money. The bankruptcy fees to file alone can be difficult when your finances are already stretched thin. And legal help can cost you anywhere from $500 to $3,000 or more.

But an experienced bankruptcy attorney may be able to save you money in the long run. An initial consult can help you apply the means test to determine whether bankruptcy is a viable option. If not, a lawyer can steer you to alternatives that fit your situation better.

If bankruptcy is a good fit, a lawyer can help you value your property, identify debts that can be discharged and any exemptions in your state. They’ll also represent you at court with the expertise to work with your creditors to the best end for you.

If you go it alone, take extra care with your filing, paperwork and testimony to ensure that everything you present is 100% accurate.

Do I qualify for Chapter 7 bankruptcy?

Eligibility relies on a bankruptcy “means test” calculation designed by the US Courts to target Chapter 7 for those who need it.

Among other guidelines, the means test establishes whether:

  • You have disposable income to repay some debts.
  • Your debts affect your ability to make ends meet month to month.
  • Your monthly income is below the median level in your state.
  • The debt you owe interferes with family relationships, your mental health and other essential aspects of your life.
  • Paying off your debts would take five years or longer.
  • Your total debt owed is equal to more than half of your annual income.

By completing the means test, you’ll have a better sense as to your likelihood of qualifying for Chapter 7.

Types of debt Chapter 7 bankruptcy covers

Common types of unsecured debts covered by Chapter 7 are:

  • Credit card debt
  • Medical bills
  • Past-due rent
  • Utility bills
  • Auto accident claims
  • Unpaid taxes

As long as your debts weren’t incurred illegally, the court will likely discharge them.

How will Chapter 7 bankruptcy affect my credit?

It’s hard to know exactly how much filing for bankruptcy affects your credit score. But expect it to drop your score by 150 to 250 points or more.

A low credit score can affect your approval for credit cards, loans and even a place to live. But bankruptcy remains on your credit history for up to 10 years, and it affects your credit less as time goes on. As soon as your bankruptcy is approved by the court, you can start rebuilding your score.

Alternatives to Chapter 7 bankruptcy

Filing for bankruptcy should be a last resort if you’re struggling with debt. Try negotiating a more manageable payment plan with your creditors first. This option is worth a try because it allows you to remain in control of your assets.

Another alternative is to try consolidating your debts with a balance transfer card or debt consolidation loan, which combines your various debts into a single monthly payment, ideally at a lower interest rate.

If you’d rather not face your debts alone, consider a debt relief company. These companies can help you create debt management plans and contact your debtors to negotiate lower rates or terms, no gavel required.

Compare debt relief companies

Updated September 21st, 2019
Name Product Costs Requirements
Monthly payment based on enrolled debt, no upfront fees
Must have at least $7,500 in unsecured debt and live in a serviced state.
Freedom Debt Relief is a debt settlement company that works to help people with unmanageable, unsecured debt get back on their feet.
18–25% of total enrolled debt
Must have a legitimate financial hardship which is preventing the ability to pay creditors and a minimum of $7,500 in debt.
Get back on your feet with a top-rated debt relief company that works with multiple types of debt.
Fees regulated by client's state of residence, can range from$0 to $69 with an average monthly fee of $35. No upfront or contingency fees.
Debt must not be payday loans or secured loans.
This debt settlement alternative can help you find a path to financial freedom.
Charges and fees vary by the company you're ultimately connected with
Must be at least 18 years old and a legal US resident; additional terms may apply based on services and products used.
This A+ BBB-rated service offers free consultations to lower your monthly payments help you get out of debt faster.
20% of enrolled debt or less, no upfront fees.
Must have verifiable income and more than $10,000 in unsecured debt or tax debt — excluding payday loans.
This company claims to significantly reduce your consumer and tax debt.

Compare up to 4 providers

Before you sign up with a debt relief company

Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And they aren’t always transparent about these costs or drawbacks that can negatively affect your credit score. You might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.

Consider alternatives before signing up with a debt relief company:

  • Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
  • Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
  • Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.

Bottom line

Chapter 7 bankruptcy can save you from unbearable financial stress. But with your credit and assets at stake, consider all possible options first.

A debt relief service may be able to help you rebuild your personal finances without the need for courts. Learn more and read our bankruptcy guide.

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