What is Chapter 7 Bankruptcy?
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Chapter 7 bankruptcy is a legal process designed to eliminate many types of unsecured debt, including credit card debt. While it can provide real relief and a new beginning, it also involves costs and may damage your credit for a long time.
Chapter 7 bankruptcy is probably the most commonly filed chapter of bankruptcy for consumers for personal debt. It can wipe the slate clean, or "discharge" many debts within a short period of time. This relief often allows filers to get a much needed fresh start. Whether or not you should file chapter 7 depends on your personal financial situation.
Chapter 7 relief sounds great, but there are also some drawbacks to filing chapter 7. As it is a form of "liquidation" bankruptcy, filers need to be careful navigating their exemptions to protect needed items, like their home and vehicle. Chapter 7 can also impact your credit score, so filers need to understand the long term repercussions, and how to rebuild credit after chapter 7.
How Chapter 7 Bankruptcy Works
When you file chapter 7, the bankruptcy court puts a "stay" or a hold on your debt (11 U.S.C. § 362). This stay, called the "automatic stay", is a powerful benefit of filing chapter 7 that stops creditor activity like collections, collection lawsuits, repossessions, and foreclosures.
A trustee is appointed by the bankruptcy court in every chapter 7 case. This trustee's job is to oversee the case by reviewing the filers finances, conducting a meeting of creditors (the 341 meeting of creditors), selling or settling assets that are not protected by a bankruptcy exemption, and distributing the funds to creditors.
The main benefit of chapter 7 bankruptcy is the discharge that filers receive from the bankruptcy court after completing the chapter 7 process. The discharge is an order from the bankruptcy court that eliminates a filer's obligation to pay the debt. It is the reason people file chapter 7.
What Debts Does Chapter 7 Bankruptcy Discharge?
Chapter 7 generally discharges unsecured debts, although certain unsecured debts are excepted from discharge. The bankruptcy court defines unsecured debts as "those (debts) for which the extension of credit was based purely upon an evaluation by the creditor of the debtor's ability to pay, as opposed to secured debts, for which the extension of credit was based upon the creditor's right to seize collateral on default, in addition to the debtor's ability to pay."
What Are Examples of the Unsecured Debts Discharged in Chapter 7?
Common examples of unsecured debts that can be discharged in chapter 7 include:
- Credit Cards
- Medical Bills
- Personal Loans
- Utility Bills
- Deficiency balances after repossession or foreclosure
What Debts Does Chapter 7 Bankruptcy Not Discharge?
Chapter 7 bankruptcy can discharge many different kinds of unsecured debts. However, it cannot eliminate everything. Chapter 7 does not discharge priority debts. It also does not discharge secured debt, although chapter 7 could discharge deficiencies after a vehicle is repossessed or a home is foreclosed.
What Are Examples of Debts That are Not Discharged in Chapter 7?
Some examples of debts that generally are not discharged in chapter 7 are the following:
- Child Support Obligations
- Alimony Obligations
- Student Loans (unless undue hardship is proven)
- Certain tax obligations (like recent taxes and certain tax penalties)
- Debts for willful and malicious injury to another person or property.
- Secured debts for which the filer still has possession of the collateral, such as a car loan or mortgage.
Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 and chapter 13 are the two main types of consumer bankruptcy that individuals file. Both are very helpful for people facing financial distress, but there are differences that are important to learn about before choosing one or the other.
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Who Can File | Individuals and businesses can file. | Individuals only. |
| Main Eligibility Rule | Income must be at certain levels. Exemptions are available (like business income and military). | Regular income is required. |
| Debt Limits | No limit. | There are debt limits (See 11 U.S. Code § 109). |
| Time to Discharge | Commonly 4 to 6 months. | Discharge available after 3 to 5 year plan. |
| What Happens to Property | Non-exempt property can be sold or settled to pay creditors. | Non-exempt property paid for in the 3 to 5 year plan. No liquidation required. |
| Cramdown | Not available. | May allow certain secured claims to be reduced to the value of the collateral when the legal requirements are met. |
| Biggest Advantage | It can give quicker relief by wiping out qualifying debt in a shorter time. | It can help you protect assets and create a structured path to catch up on important payments. |
| Biggest Drawback | You may lose nonexempt property, and it does not give you a long-term payment plan to fix arrears. | You must stay in a repayment plan for several years and commit disposable income to the plan. |
See our guide on chapter 7 vs chapter 13 bankruptcy for a more detailed comparison of these two chapters.
If you are not sure which chapter may fit your situation better, use the tool below to compare income, goals, assets, and budget. You can also visit our chapter 7 vs chapter 13 decision tool page.
Chapter 7 vs Chapter 13 Decision Tool
Answer the questions below to see whether chapter 7 or chapter 13 appears to be the better fit based on your income, goals, and asset-protection needs.
Step 1 of 2
Window 1 of 2: Income Snapshot
ZIP lookup is optional and used as a quick state check.
This tool is for educational purposes only and is not legal advice.
When is Chapter 7 Bankruptcy a Better Option Than Chapter 13?
Below are a few situations where chapter 7 bankruptcy might be a better option:
You Have Little Property and Lots of Unsecured Debt
Chapter 7 is often a better fit for someone who does not own much property and is overwhelmed by unsecured debt. For example, a person who rents, owns modest household goods, has an older vehicle, and is struggling with credit card debt, medical bills, or personal loans may benefit more from chapter 7.
You Cannot Afford a Monthly Repayment Plan
Chapter 7 may be the better option for someone who doesn't have the income for a chapter 13 plan. Some people are already having trouble paying for rent, groceries, utilities, and other basic living expenses. If there is no realistic room in the budget for a monthly plan payment, chapter 7 may be a better option.
You Have Little Income and Few Assets
If you don't have a lot of income, you may even be unemployed, and you don't have many assets, a chapter 7 may be a good way to discharge your debt and get a fresh start.
You Need Faster Debt Relief
Chapter 7 can be a better option when the main goal is to get rid of unsecured debt as quickly as possible. A person who is buried in credit card debt, medical debt, or old personal loans may prefer chapter 7 because discharge is much faster than chapter 13.
When There Is Nothing Important to Catch Up Through a Plan
If a person is not trying to save a home from foreclosure, stop a repossession with a repayment plan, or cure other past-due amounts over time, chapter 7 may be the simpler and better option.
Legal Sources: The law behind chapter 7 and chapter 13 is found in 11 U.S. Code Chapter 7 and 11 U.S. Code Chapter 13.
What Qualifies You to File Chapter 7 Bankruptcy?
You have to qualify to file chapter 7 bankruptcy. If you meet the following criteria, you usually can file chapter 7 and receive a discharge:
Meet the Income Criteria
To qualify for chapter 7, your average income must be below the median income for your jurisdiction, which is usually the median income of your state. Check out our median income calculator if you want to see whether or not your average income is below your state's median income.
If your income is above your state's median income, that is not the end of the analysis. You can still qualify by taking the means test. Check out our means test calculator if you think your income is above your state's median income limits. For more information on the means test see the US Trustee's website.
Complete Credit Counseling
You must take a credit counseling course from an approved provider within 180 days of filing your chapter 7 case.
Meet the Prior Bankruptcy Case Requirement
If you received a chapter 7 discharge in a case filed within the last eight years or a chapter 13 discharge in a case filed within the last six years, you usually cannot get a chapter 7 discharge. Also, if you have a recent bankruptcy case that dismissed or voluntarily dismissed you may have to wait 180 days before filing again.
Why Are Bankruptcy Exemptions Important in Chapter 7 Bankruptcy?
Bankruptcy exemptions are laws that allow you to protect property in your chapter 7 case. Think of bankruptcy exemptions as bodyguards for your property. Since chapter 7 is a form of "liquidation" bankruptcy, it is important to understand and maximize the use of your exemptions. Without them, a trustee could sell all of the property you own and distribute the proceeds to your creditors.
Where you file, generally determines what exemptions you may use. While bankruptcy is a federal process, the states determine their state's exemptions. So the exemptions available to you in Arizona will be different than the exemptions available to you in Ohio, for example. Check out our national bankruptcy exemption reference guide national bankruptcy exemption reference guide to get an idea what the exemptions are in your state.
Bankruptcy Attorney Insight: It is very important to know exactly how your exemptions will affect your case before you file.
How Much Does It Cost to File Chapter 7 Bankruptcy?
There are generally three different categories of fees for filing chapter 7:
Credit counseling and debtor education courses:Before you file, you must complete a credit counseling course. Before you can receive a discharge, you must also complete a debtor education course. These courses often cost about $10 to $50 each.
Court fees:Right now the fee for chapter 7 is $335. This amount includes the filing fee, administrative fee, and trustee surcharge. This amount changes periodically. If you cannot pay the full amount up front, the court may allow you to pay in installments.
Attorney fees:You are not required to have an attorney represent you when you file chapter 7, but many do. Attorney fees usually depend on where you live and how complicated your case is. Chapter 7 attorney fees commonly range from about $1,500 to $2,500. Many bankruptcy attorneys charge a flat fee.
How to File for Chapter 7 Bankruptcy
Filing a chapter 7 case usually involves a series of required steps. Some people hire a bankruptcy lawyer, while others file on their own, but the basic process is generally the same.
Take the First Required Course
Before your case can be filed, you must complete a credit counseling course through an approved provider. That course has to be taken within the 180-day period before filing.
Prepare and File Your Bankruptcy Forms
A chapter 7 case begins when you file a petition and related schedules with the bankruptcy court. These forms disclose your income, expenses, debts, property, recent financial history, and other information the court requires.
Give the Trustee Your Financial Records
After filing, the trustee assigned to your case will review your paperwork and may request supporting documents. Common examples include pay stubs, tax returns, bank statements, and your certificate showing completion of credit counseling.
Appear at the 341 Meeting
You will also need to attend the meeting of creditors, often called the 341 meeting. At that hearing, the trustee places you under oath and asks questions about your finances, your paperwork, and your property. In many cases, creditors do not attend, but they have the right to appear.
Finish the Second Required Course
To receive a discharge, you must also complete a debtor education course after the case is filed. If you do not complete this step and file the required certificate, the court may close the case without entering your discharge.
Receive Your Discharge
If there are no problems in the case, the court will usually enter a discharge order after the waiting period expires. That order eliminates many qualifying debts and is the final step for most chapter 7 filers.
How Chapter 7 Affects Your Credit
Filing chapter 7 will affect your credit report. For many people, the impact feels significant at first. But the full picture is more nuanced than most headlines suggest.
Bankruptcy is reported on your credit history for up to 10 years from the filing date. That does not mean you will be unable to obtain credit for 10 years. It means lenders can see the filing during that time and factor it into their decision-making.
Rebuilding Your Credit After Chapter 7
Chapter 7 is often described as a fresh start, so it is important to understand how to rebuild your credit after your case is over. The good news is that many people begin rebuilding sooner than they expect. The key is consistency, not speed. Credit recovery does not happen overnight. Here are some tips to help.
Review Your Credit Reports Carefully
After your discharge, obtain copies of your credit reports and review them line by line. Accounts included in your bankruptcy should generally show a zero balance and indicate they were discharged.
- Look for incorrect balances.
- Check that discharged debts are not still reported as active.
- Dispute any inaccuracies directly with the credit bureau.
Establish Positive Payment History
Payment history is one of the most important components of your credit score. Even small, manageable accounts paid on time can help rebuild your profile over time.
- Consider a secured credit card (which requires a refundable deposit).
- Keep balances low relative to the credit limit.
- Set up automatic payments to avoid missed due dates.
Opening multiple new accounts too quickly can work against you. A steady, conservative approach is usually more effective than aggressive credit rebuilding.
Build Financial Stability First
Credit scores tend to improve when underlying finances improve. Before focusing heavily on new credit, consider:
- Creating a realistic monthly budget.
- Building an emergency savings cushion.
- Avoiding high-interest products that could restart a debt cycle.
A Realistic Timeline
Credit rebuilding is a marathon, not a sprint. Many people see measurable improvement within the first year after discharge if they prioritize a budget, a savings cushion and maintain on-time payments and low balances.
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