Chapter 7 Bankruptcy FAQ

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What is Chapter 7?

Chapter 7 bankruptcy, or "straight bankruptcy", allows qualifying individuals to discharge (effectively cancel) most or all of their debts, with some exceptions (see "Will filing Chapter 7 discharge all my debts?" below). However, Chapter 7 provides for "liquidation", which means that you could lose your non-exempt assets and/or property. For more on liquidation, see the next question. Also, you may wish to refer to our Chapter 7 Overview.

What is "liquidation"?

Liquidation is a process in which a debtors nonexempt property is sold ("liquidated"), the proceeds of which are then paid to creditors. Sales are handled by an impartial bankruptcy court-appointed trustee. You will likely need to discuss your financial circumstances with a bankruptcy law professional to determine which assets you will be able to classify as exempt.

Does liquidation mean that I will lose my house?

Losing your home is a possibility, but not innevitable in most cases (provided that you have kept up on mortgage payments). This is a good example of the of the importance of consulting a knowledgable bankruptcy attorney, as a seasoned lawyer can make a big difference in protecting your high-priority assets. In some cases, it may be advantageous to surrender your home, as you can be relieved of debt associated with it. Again, this is also a complex decision, and one we believe you should discuss with an attorney. Either way, if keeping your home is a foremost concern, you should assess whether declaring Chapter 13 is feasible, as it provides more solid prevention of foreclosure.

Will filing Chapter 7 discharge all of my debts?

While Chapter 7 will allow most people to discharge the majority of their debts (i.e. credit cards, medical bills, private loans, etc.), there are some exempt debts that you are still required to pay. These exemptions commonly include (but are not limited to):

Taxes/back taxes

Court ordered payments such as alimony and child support

Government Loans

Most student loans

Debts from judgements in a criminal case, or debts incurred by fraudulent activity

Will filing Chapter 7 ruin my credit?

A chapter 7 filing will appear on your credit report for 10 years, and will innevitably have a significant negative impact. Major credit purchases (like a house or car) will likely be extremely difficult during this period. On the other hand, it is likely that you will still be able to obtain lesser lines of credit (like credit cards), albeit from "subprime lenders" who will charge higher interest rates. If you have the means to pay off your debts over time, you may want to consider filing under Chapter 13, which remains on your record for the same length of time, but may be viewed less negatively as it does indicate your effort to pay back your creditors.

Will I have to attend a bankruptcy court hearing?

Typically, you will not have to go to what you might think of as a "trial" in court. Instead, you will receive notice requiring you to appear at a creditors meeting (or "341 meeting"). At this meeting, you will be expected to answer questions (under oath) asked by a court-appointed trustee, whose purpose is primarily clarifying any questions about the forms and documentation that you've already filed. Your creditors may attend, but very often choose not to. Although the atmosphere is somewhat informal, it is absolutely critical that you do attend, and recommended that you bring your attorney, if you've enlisted one. (see also: Do I really need a bankruptcy lawyer to file for bankruptcy?)

Do I qualify for Chapter 7 relief?

Unfortunately, it is impossible to definitively answer this question on this page. Your ability to qualify will be determined by a "means test", which uses numerous financial factors to calculate your eligibility. In very generalized terms, if the sum of your income, minus the sum of your expenses is lower than the state median, you will probably qualify for Chapter 7. To get a general sense for your eligibility, you can find various websites that offer online means test calculators. Keep in mind that these only provide estimations, so it is highly recommended that you discuss eligibility with a specialized bankruptcy lawyer or trusted financial advisor. Factors that might disqualify you for Chapter 7 bankruptcy include:

Your income level is too high

You have already received a Chapter 7 discharge in the past 8 years

A recent filing was dismissed because you violated the terms or failed to appear at a hearing

Your claim is deemed as "abuse", meaning you could conceiveably pay your debts, but don't want to

What happens if I'm denied discharge? Can I re-file?

If your Chapter 7 filing is denied, you will remain accountable for all of your debts, and you will have to wait 180 days before attempting to re-file. Before refiling, you should be certain that you understand the grounds of your previous denial, and make sure that you are filing under the appropriate chapter and terms. In rare cases, you may have grounds to appeal your dismissed filing, but this is something that should be discussed with your attorney.

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Disclaimer: The content of this page is intended for informational purposes only, and does not constitute legal advice/counsel.

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