Chapter 7 bankruptcy

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.

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:

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.

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National Debt Relief		15–25% 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.	Go to site View details	Compare	loading Fetching your data...
Freedom Debt Relief		Monthly payment based on enrolled debt, no upfront fees	Must have at least $7,500 in unsecured debt, have a hardship is preventing the ability to pay creditors, 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.	Go to site View details	Compare	loading Fetching your data...
Accredited Debt Relief		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.	Go to site View details	Compare	loading Fetching your data...

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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.

Frequently asked questions

• What if I can't afford to file for bankruptcy?

  Take advantage of a free consultation with a lawyer. Or contact your local Legal Services Corporation or a similar nonprofit to see if they can refer you to attorneys willing to work with eligible clients for free or at discounted rates.

• Are there any debts that Chapter 7 bankruptcy won't discharge?

  Yes. Among debts that don’t typically discharge are:

  • Unscheduled debts — or debts not listed in your bankruptcy paperwork.
  • Select taxes, fines and penalties owed to the government.
  • Spousal or child support.
  • Court and attorney fees.
  • Student loans.
  • Debts incurred due to impaired driving.

• Can my bankruptcy discharge be denied?

  Yes. Filing for bankruptcy demands honesty and cooperation. If you fail to disclose your financial information, lie about the details or violate a court order, you face denial of your discharge.

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