How to File for Chapter 7 Bankruptcy
The word bankruptcy is enough to make anyone nervous, but it can provide a fresh start if you’re out of options. Even so, this decision will impact your life for years to come. And in the case of Chapter 7, you may be forced to sell some of your assets.
Learning more about how to file for Chapter 7 bankruptcy can help you better understand if this extreme measure is right for you.
What is Chapter 7 bankruptcy?
Bankruptcy is a legal process that can reduce or eliminate your debt.
There are several types of bankruptcies. Chapter 7 (also known as liquidation bankruptcy) requires you to sell certain assets and use those funds to pay debt. Any leftover debt you have after selling your assets may be discharged (or forgiven).
If you don’t own any eligible assets, you can still file for Chapter 7 bankruptcy. This is called a no-asset case, and most Chapter 7 filings fall under this umbrella. Also, Chapter 7 is typically geared toward lower-income borrowers with little to no disposable income (more on that later).
Once your case is filed, you will get an automatic stay. That means that most creditors must stop calling you and must stop any wage garnishments and lawsuits.
It’s important to know that not all debt qualifies for discharge in bankruptcy, as shown in the table below.
| Dischargeable debt | Nondischargeable debt |
|---|---|
Personal loans and credit cards Medical bills Loans from family, friends and employers Past-due utility bills and rent payments Bills in collections Civil court judgments (most of the time) Business-related debt Social Security and Veterans Administration (VA) overpayments | Student loans (sometimes) Alimony and child support Unpaid taxes (in some cases) Government-backed loans Debts resulting from death or personal injury while you were driving while intoxicated Debts resulting from willful or malicious injury or property damage Criminal restitution (in some cases) |
What assets can you lose in Chapter 7 bankruptcy?
You don’t have to sell all of your assets during Chapter 7. Generally, property that you need for everyday living is exempt. The definition of exempt and nonexempt varies by state, but below are some common examples.
| Exempt assets | Nonexempt assets |
|---|---|
Cars (up to a certain value) Basic clothing and uniforms Necessary household items and appliances Retirement accounts and life insurance policies Tools you need for your job Alimony and child support Money in the bank from government benefits such as Social Security and VA pension | Collectibles and coins Cars that are not daily drivers Second homes Cash, bank accounts and investments not linked to retirement Musical instruments (unless you’re a professional musician) |
Debt from secured loans works differently. Secured loans are ones that require collateral, such as a car loan. If you’re making payments on a nonexempt asset, you may be able to keep it as long as you continue making payments.
Who qualifies for Chapter 7 bankruptcy?
Before filing for a Chapter 7 bankruptcy petition, you should know whether you qualify. If your monthly income is more than the median in your state, you will have to pass a means test. Basically, you must prove to the court that you don’t have enough disposable income to reasonably handle your debt.
You probably won’t qualify for Chapter 7 bankruptcy if you have a high income or have a lot of cash in the bank.
How to file for Chapter 7 bankruptcy
If you’ve reviewed the pros and cons of bankruptcy and have decided that Chapter 7 is right for you, here’s how to get started.
1. Complete pre-bankruptcy credit counseling
You have to complete a pre-bankruptcy credit counseling course at least six months before you file. You can find an approved credit counseling agency through the Justice Department’s database (or this database if you live in Alabama or North Carolina).
2. Find an attorney
You can file for bankruptcy without a lawyer, but that doesn’t mean it’s a good idea. Bankruptcy law is complicated, and it may be worth working with a professional to avoid expensive mistakes. The National Association of Consumer Bankruptcy Attorneys (NACBA) maintains a searchable database that can help you find a bankruptcy lawyer near you.
3. Prepare bankruptcy forms and petition the court
The Chapter 7 process officially starts when you petition the bankruptcy court. Here, you’ll file paperwork and provide tax returns. It’s at this point that you’ll get an automatic stay.
4. Meet your trustee
After your bankruptcy filing, the court will open an estate. The estate will technically own your property. It will also appoint you a trustee. This is an impartial party who will handle selling your nonexempt assets (if you have any).
5. Attend meeting of creditors
Your trustee will schedule a meeting where you, your lawyer and your creditors review your financial information. Bankruptcy judges are not allowed to attend. You’ll be placed under oath, and the trustee will use this meeting to help determine if you qualify for Chapter 7.
6. Sell nonexempt property and pay creditors’ claims
Once your trustee determines that you qualify for Chapter 7, they will sell your nonexempt assets. Then they will use that money to pay your creditors. You’ll get any leftover funds after all your nonexempt debts are paid.
7. Request to keep secured debt
You might be able to keep some of your secured-debt property, but only if you request it. For instance, your lien holder may let you keep your car, as long as you pay off all (or part) of your car loan.
To keep eligible secured property, you must get a written agreement from your creditor and file it with the court (before your debts are discharged). This is called reaffirming a secured debt.
8. Take debtor education course
Before the court will discharge your debts, you must take a debtor education course. You can find approved courses through the Justice Department’s debtor education database.
9. Debts are discharged
Once you’ve filed all the necessary paperwork (including your pre-bankruptcy counseling and debtor education certificates), your remaining eligible debt will be discharged.
For most people, Chapter 7 bankruptcy takes four to six months to complete.
How does Chapter 7 bankruptcy affect your credit?
Credit is personalized, and so are bankruptcy cases. As a result, credit scores after bankruptcy will be different for everyone. Typically, the higher your score before you filed, the more your score will go down afterward — perhaps as much as 200 points.
In any case, you should expect your score to plummet. Buying a car after bankruptcy can be tough. The same goes for getting a mortgage.
Chapter 7 bankruptcy stays on your credit report for 10 years, but that doesn’t mean your score will suffer for a decade. By making on-time payments and avoiding new debt (at least, at first), you’ll probably see your credit score creep up over time.
If you have good credit, you may want to explore options other than bankruptcy. Good credit can take years to build, and bankruptcy will undo that progress. If you already have bad credit, you have less to lose. As a result, the fresh start of bankruptcy could outweigh its negative impact to your credit score.
Tips to improve your credit score after bankruptcy
Life after bankruptcy will likely look a little different than before you filed. Still, there are plenty of ways to get back on track.
Limit your new debt. Instead of taking out a new loan or card, now’s the time to create a budget. And since you’re no longer bogged down by debt, it may be easier to set aside extra money for an emergency fund.
Consider a secured credit card. When you’re ready, a secured credit card might be a good way to rebuild your credit. These require a deposit, which also acts as your spending limit. Using your secured credit card as intended can show future lenders that you’re practicing responsible borrowing habits.
Become an authorized signer. Becoming an authorized signer on a credit card can help improve your credit score. Just be sure that the cardholder has good credit and uses their card responsibly. If they don’t pay, your credit score may also be affected.
Keep tabs on your credit score. Watching your credit score rise can be a powerful psychological motivator. Get your free credit score with LendingTree Spring. You’ll also get personalized insights that can help you understand the ins and outs of your credit profile.
Alternatives to Chapter 7 bankruptcy
Chapter 13 bankruptcy
The outcomes of Chapter 7 and Chapter 13 are generally the same (reduced, restructured or eliminated debt). However, you don’t have to sell assets under Chapter 13. You also have to pay at least some of your debt on a three- to five-year payment plan.
Chapter 13 might make more sense for borrowers with eligible assets to lose. The same goes for those who can pay their debt under a payment plan. Notably, Chapter 13 only appears on your credit report for seven years rather than 10.
Debt consolidation
Debt consolidation requires you to get one loan and use it to pay off multiple, smaller debts. After, you’ll only have one bill to pay (your debt consolidation loan). You might also qualify for a better interest rate if you’ve improved your credit since taking out your original loans or cards.
Since consolidating only restructures your debt, it will only work if you can handle what you currently owe.
Debt management plan
During your credit counseling sessions, you might find that a debt management plan (DMP) is all you need. While under a DMP, a credit counselor might get you lower rates by negotiating with your creditors. If all goes right, you should be debt-free in three to five years.
Frequently asked questions
Although Chapter 7 can wipe the slate clean, it will have a drastic impact on your credit score. It will show on your credit report for 10 years, and your credit score could tumble hundreds of points. And for Chapter 7 specifically, you may also lose assets in the process. You’ll also be responsible for court costs, and paying for an attorney is strongly encouraged.
When you file for Chapter 7, you will pay the court a $245 filing fee, a $75 miscellaneous administration fee and a $15 trustee surcharge. The court may waive these fees if your income is less than 150% of the poverty level (defined by Bankruptcy Code). These do not include attorney fees, which vary.
If you file for Chapter 13, the court will charge you a $235 case filing fee and a $75 administrative fee. Attorney fees are not included.
You can file for bankruptcy jointly with your spouse. If that’s the case, then the bankruptcy will affect their credit score and appear on their credit history. But even if you aren’t filing jointly, you will have to provide your spouse’s financials as household income.
Also, if your spouse is listed as a co-borrower on your discharged debts, they are still obligated to pay. In other words, only your name will be removed from the loan or card.