What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy — often called "liquidation bankruptcy" — allows individuals and businesses to discharge most unsecured debts and get a fresh financial start. A court-appointed trustee reviews your assets, and non-exempt property may be sold to pay creditors. In practice, the vast majority of Chapter 7 cases are "no-asset" cases, meaning filers keep everything they own because it is all protected by exemptions.
The entire process typically takes 3 to 6 months from filing to discharge — far faster than Chapter 13, which requires a 3 to 5 year repayment plan.
The Means Test: Do You Qualify?
Not everyone can file Chapter 7. You must pass the Means Test, a two-part calculation introduced by the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
Part 1 — Income Comparison
Compare your average monthly income over the past 6 months to the median income for your state and household size. If your income is at or below the median, you automatically pass and may file Chapter 7.
Part 2 — Disposable Income Calculation
If your income exceeds the state median, you must calculate "disposable income" after allowed deductions (housing, food, transportation, taxes, medical). If disposable income falls below a threshold, you may still qualify. If it is too high, you may be limited to Chapter 13.
What Debts ARE Dischargeable in Chapter 7?
Debts Typically Wiped Out
- Credit card balances and interest
- Medical and hospital bills
- Personal loans from banks or individuals
- Utility bills and past-due service accounts
- Lease obligations on surrendered property
- Old civil court judgments (in most cases)
- Business debts from a sole proprietorship
- Deficiency balances after repossession
What Debts Are NOT Dischargeable?
- Student loans — dischargeable only under extreme hardship (very rare; requires separate adversary proceeding)
- Child support and alimony — domestic support obligations are never discharged
- Most tax debts — recent income taxes (generally last 3 years) survive; older taxes may be dischargeable
- Debts from fraud or false pretenses — creditors must file an objection to discharge
- Criminal fines, restitution, and DUI-related death/injury debts
- Willful and malicious injury to persons or property
The Chapter 7 Filing Process
Chapter 7 vs. Chapter 13: Quick Comparison
| Feature | Chapter 7 | Chapter 13 |
|---|---|---|
| Nickname | Liquidation | Reorganization / Wage Earner Plan |
| Time to Complete | 3–6 months | 3–5 years |
| Income Requirement | Must pass means test | Must have regular income |
| Non-Exempt Assets | May be sold by trustee | Keep all assets; repay through plan |
| Mortgage Arrears | Cannot cure; house may be lost | Can catch up over plan period |
| Stays on Credit Report | 10 years | 7 years |
| Filing Fee | $338 | $313 |
| Best For | Low income, unsecured debt | Higher income, saving home/car |
Exemptions: What You Keep
Federal and state exemptions protect certain property from being sold by the trustee. Some states let you choose between federal and state exemptions; others require you to use state exemptions only.
- Homestead exemption: Protects equity in your primary residence. Ranges from $25,000 (many states) to unlimited (Texas, Florida). Federal exemption is approximately $27,900.
- Motor vehicle exemption: Typically $2,400–$5,000 in equity. Some states allow more. If you owe more than the car is worth, it may be fully protected.
- Retirement accounts: 401(k), 403(b), IRA, and most pension plans are fully exempt under ERISA and federal bankruptcy law. This is one of the strongest protections in bankruptcy.
- Household goods and furnishings: Usually up to $600 per item or a lump sum (federal: ~$700/item, $14,875 aggregate).
- Tools of the trade: Work equipment and tools needed for your livelihood, often $2,500–$3,000.
- Wildcard exemption: Federal law allows a wildcard exemption of approximately $1,475 plus unused homestead exemption, which can be applied to any property.
How Bankruptcy Affects Your Credit
A Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date. However, many filers find their credit score actually improves within 1–2 years of discharge because their debt-to-income ratio drops dramatically. Secured credit cards, credit-builder loans, and responsible use of new credit can accelerate recovery.