The one-sentence version
Chapter 7 involves a type of bankruptcy in which most of your unsecured debt — such as credit card debt, medical bills, and personal loans — is legally wiped out after about four months, provided you give up any property that isn't covered by exemption laws.
That's all there is to it; the rest is just detail.
What “discharge” actually means
A successful Chapter 7 case ends with what is known as a discharge order — a one-page document signed by a federal judge which basically means “the debts listed in this case can no longer be collected.” Creditors are not allowed to telephone you, take you to court, seize your wages, or report the debt as being owed. Although the debt still remains as a historical fact, it is no longer legally enforceable.
Most consumer debt is dischargeable:
- Credit card balances
- Medical bills
- Personal loans (including payday loans)
- Old utility bills, gym memberships, deficiency balances on repossessed cars
- Most lawsuit judgments based on contract or negligence
What doesn't get discharged
A handful of debts survive Chapter 7 — Congress decided they're too important or too recent to wipe out:
- Most student loans can only be discharged by bringing a separate “undue hardship” adversary proceeding, and it is difficult to win such a proceeding.
- Debt from recent income tax assessments almost never qualifies for discharge, whereas older tax debt (typically three years or more in age and with returns filed on time) can at times be discharged.
- Obligations in the area of domestic support — namely child support and alimony.
- Criminal fines and restitution.
- A person who has a debt resulting from fraud, embezzlement, or intentional harm must make an objection and prove it in your case.
- The debt which is backed by the government (in the case of some tax penalties and some overpayments).
Good to know: secured debts (such as mortgages and car loans) aren't actually discharged in the same way as unsecured debts. Even though the personal responsibility to pay may be cancelled, the lender still holds a lien on the property. If you wish to retain the house or the car, then you must continue making the payments; if you don't, you have to give it up, and at that point the rest of the debt is eliminated.
Who Chapter 7 is for
The structure of Chapter 7 is intended for individuals who truly cannot pay back the money they owe within any reasonable period of time — most of the time this is because the debt is unsecured (for example, credit card debt, medical bills, or personal loans) and their income is simply not high enough to make small payments towards it. In contrast, if you are able to afford a payment plan stretching over three to five years that eliminates a significant portion of your debt, the law usually directs you to Chapter 13.
The threshold for Chapter 7 is known as the Means Test. To put it briefly, you automatically qualify if your average gross income over the previous 6 months (on an annualized basis) is below the median level for your household size in your state. However, if your income is above the median, a more extensive calculation is carried out which involves deducting allowable expenses in order to determine whether or not you have “disposable income” with which to pay for a Chapter 13 plan. We have a separate article that explains this — see Do I qualify for Chapter 7?
The timeline, start to finish
The majority of Chapter 7 cases take about 3 to 4 months to go from filing to discharge. The timetable is as follows:
- From day −180 up to day 0, you must complete an online credit counseling course (the course takes about 60 to 90 minutes and costs $15 to $50).
- On day zero you file your petition and schedules with the federal court, when the automatic stay comes into effect immediately and creditors have to cease all collection calls, legal actions, wage garnishments and foreclosures.
- On day 30–45 there is the 341 Meeting of Creditors. It is a brief meeting (typically lasting between 5 and 10 minutes and usually held via Zoom) at which the trustee questions you under oath regarding the documentation you have provided. Although creditors are permitted to be present, they almost never do.
- From day 30 to about 60, you must take a debtor education course. This is a second course that is required (and of similar length and cost to the first one). You have to finish it before the discharge is granted.
- From day 60 to 90 — the period during which objections can be made. When the 341 meeting has taken place, creditors and the trustee have a set amount of time (typically 60 days) to object to the discharge. In the majority of cases, no objections are made.
- On day 100 to 120 the discharge order was handed down. The court then closes the case shortly afterwards.
The trustee — who they are, what they do
On filing, the court designates a Chapter 7 trustee for your case. This trustee is a private lawyer (not a judge, not a member of the court staff), and their role is to:
- Review your schedules for accuracy and completeness
- Look for any non-exempt property worth selling to pay creditors
- Run the 341 meeting and put you under oath
- Distribute any sale proceeds to creditors according to legal priority
In most consumer cases there is no property worth selling which is not exempt — such cases are referred to as “no-asset cases.” The trustee then prepares a brief report stating “there is nothing to administer here,” and the case moves directly on to discharge.
What you can keep — exemptions
Bankruptcy law provides for a certain minimum amount of property to be protected, so that you won't end up with nothing at all as a result of the process. These protections are known as exemptions, and are determined both by federal law and by each state's law — some states require filers to use the state's own set of Chapter 7 bankruptcy exemptions rather than the federal list, while others let you choose between the two. The usual categories of exemption are:
- Homestead — equity in your primary home (amounts vary wildly by state, from a few thousand dollars to unlimited)
- Motor vehicle equity
- Household goods, clothing, personal effects
- Tools of the trade (work equipment)
- Retirement accounts — 401(k)s, IRAs, and pensions are almost always fully protected
- A “wildcard” exemption you can apply to anything
If all the possessions you own are covered by your exemptions — since this is the case for the majority of filers — you retain them all.
Be careful: any equity in an asset that exceeds the exemption limit can be sold by the trustee. In a state that has a $50,000 homestead exemption, for example, if you own a house with $80,000 of equity, the trustee has the authority to force a sale and apply the $30,000 that results to pay the creditors. This is one of the main reasons why individuals who have a large amount of non-exempt assets usually look into Chapter 13 instead.
The automatic stay — the moment of relief
The most powerful thing that occurs when you file for Chapter 7 is the automatic stay, which comes into effect as soon as the petition is entered on the court's electronic docket. Once the automatic stay is in place:
- Collection calls and letters must stop
- Lawsuits are paused
- Wage garnishments must be released
- Foreclosure sales are halted (at least temporarily)
- Utility shutoffs are blocked for at least 20 days
For those who have been avoiding collectors for months, this is usually the point at which the continuous pressure finally disappears.
What it costs to file
The mandatory out-of-pocket costs for a pro se (self-represented) Chapter 7 case are small:
- $338 — court filing fee (can be paid in installments, or waived for very low income)
- $15–$50 — pre-filing credit counseling
- $15–$50 — debtor education course
When you employ an attorney, you should add about $1,000 to $2,500 for the fixed fee. This is the gap that BK Prepare is designed to bridge, by offering a free way to find the exact Chapter 7 bankruptcy forms your situation requires — and your court's own local forms — so self-preparation is more realistic.
What it does to your credit
A Chapter 7 bankruptcy will remain on your credit report for 10 years from the date of the filing. The extent to which your credit score is affected depends quite a bit on your previous score — if you had already been late on several accounts, the slight decrease is often less than people anticipate. For many people who file, their score starts to recover after 12 to 18 months, particularly if they reopen a secured credit card and make payments on time.
The honest summary
Chapter 7 can be used as a tool, and is extremely effective in one particular case — that is, when there is a large amount of unsecured debt, insufficient income to pay it off, and no substantial assets that are at risk. However, it is less suitable — or indeed not at all appropriate — for individuals who are falling behind on a mortgage that they wish to retain, those who have a great deal of recent tax debt, people who own a business, or those whose income is high enough to allow them to follow a repayment plan. In such cases, Chapter 13 or some other approach might fit better. For more, see Chapter 7 vs 13 vs 11.