How Chapter 7 Bankruptcy Works
Updated: 2020-07-16 by
For most people, the goal of Chapter 7 bankruptcy is to wipe out as much debt as possible. In legal terms, this is called having your debts “discharged.”
In exchange for your bankruptcy discharge, you must be willing to turn over any of your property that is not exempt under bankruptcy law. The bankruptcy trustee in charge of your case will liquidate (sell) the property to pay as much as possible to your creditors; that’s why Chapter 7 is often called “liquidation bankruptcy.”
This article covers:
- Debts You Can Discharge
- Debts You Can’t Discharge
- Stopping Debt Collectors
- Protecting Exempt Property
- Figuring Out if You’re Eligible
- How to File for Bankruptcy
The short answer is that you can discharge all your debts except those that the law doesn’t allow you to erase. (We list non-dischargeable debts in the next section.) Here are some of the most common dischargeable debts:
- credit card debt
- medical bills
- personal loans from friends, family, or others
- past-due utility bills
- past-due rent
- checks you’ve unintentionally bounced
- auto accident claims, unless you were under the influence
- amounts you owe on repossessed property
- court judgments, as long as they’re not criminal or based on fraud
- business debts
- tax penalties or older tax debts
- collection agency accounts
Caution—Bankruptcy Does Not Discharge Debts You Incur After Filing!
Chapter 7 bankruptcy discharges only the debts you take on before the date you file your bankruptcy petition. You will be legally responsible for any debts you incur after you file.
Bankruptcy can’t get rid of every kind of debt. Even if you get a Chapter 7 discharge, the law will still require you to pay:
- most taxes
- most student loans
- child support or alimony
- debts you owe under a divorce or separation agreement
- fines, penalties, or criminal restitution payments, and
- any debts related fraud you’ve committed or injuries you’ve caused.
In addition, you often can’t discharge debts that are “secured” by a particular piece of property. For example, if you have a car loan, the lender may be able to repossess your car. If you have a home loan and can’t show that your home is exempt under bankruptcy law, the lender may have the right to foreclose your mortgage.
After you file your bankruptcy petition with the court, an order called the "automatic stay" immediately stops most collection actions and civil lawsuits against you. The bankruptcy clerk notifies your creditors and, while the stay is in effect, they generally can't call you, garnish your wages, repossess your property, or sue you.
That said, the automatic stay won't stop certain legal actions against you, including:
- collection of child support or alimony
- repayment of loans from most retirement funds
- any criminal proceedings against you
- certain tax proceedings, or
- other actions or collections described in the U.S. bankruptcy code (see 11 U.S. Code, Section 362(b)).
In addition, the protection of the automatic stay may be shortened or denied altogether if you've filed for bankruptcy multiple times.
If you file for Chapter 7 bankruptcy, the bankruptcy trustee assigned to your case may sell your property to pay your debts unless the law specifically allows you to keep all or a part of it. The property you’re allowed to keep is called your “exempt property.” For example, exemptions may allow you to keep at least some of the equity in your home, a car, and personal property such as your clothes and household goods.
Bankruptcy exemptions aren’t automatic. You must figure out what is exempt and list that property on your bankruptcy forms, along with the specific laws that allow you to claim the property as exempt. Exemptions are determined by state law; some states have their own exemptions, while others allow you to use the exemptions provided by the federal bankruptcy code.
For more information on California law, see the Exemptions section of this website.
To qualify for Chapter 7 bankruptcy, your bankruptcy forms need to show that you don’t have enough income to repay your creditors a certain amount. You can accomplish this by either:
- proving that your income is below the California median income for your household size, or
- comparing your income to expenses under a complex formula called the bankruptcy means test calculation to show that you’re not able to pay.
If your income is above the median income for your state and family size and the means test shows you have enough disposable income to make reasonable payments to your creditors, the bankruptcy court may dismiss your case—or you may be allowed to file bankruptcy under another chapter of the bankruptcy code, like Chapter 13.
Our free means test calculator can do the math for you, so you can figure out whether you'll qualify for Chapter 7.
If bankruptcy sounds like it may be the right solution for you, learn more about the process in How to File for Bankruptcy in Bakersfield, California.
Or you may want to jump right into a more in-depth resource like Nolo’s book, How to File for Chapter 7 Bankruptcy, which walks you through the process step-by-step, including how to fill out and file your bankruptcy forms.
You may also be interested in:
If your creditors will negotiate, if bankruptcy can't cancel most of your debts, or if you're truly broke, bankruptcy may not be the best solution for you. Here's how to decide.
You can use Chapter 13 bankruptcy to get out from under the burden of your debts, protect important property, and stop bill collectors.
Tips for keeping bankruptcy costs down, from court filing fees to mandatory counseling costs to getting legal help.