FAQs for Chapter 7 Bankruptcy

Who Can File Chapter 7 Bankruptcy?

You must have a place of residence, a place of business, or property in the U.S.in order to file. You can file a Chapter 7 bankruptcy petition whether or not you are employed.

In addition, you must not have:

  • been granted a Chapter 7 discharge in another case filed within the last eight years,
  • completed a Chapter 13 plan which paid your unsecured creditors less than 70 cents on the dollar within the last six years, or
  • had a bankruptcy filing dismissed for cause within the last 180 days.

What is the difference between Chapter 7 and Chapter 13?

In Chapter 7, you are subjecting your non-exempt assets to court liquidation and attempting to discharge those debts that Chapter 7 will eliminate. In Chapter 13, you are reorganizing your debts and paying a portion. The choice depends on the kinds of debts you owe, your income, and the value of your assets.

Chapter 7 is known as "liquidation bankruptcy." In a Chapter 7 case, you file several forms with the bankruptcy court listing income and expenses, assets, debts, and property transactions for the past year. A court-appointed individual, the bankruptcy trustee, is assigned to oversee your case.

About a month after filing, you must attend a First Meeting of Creditors where the trustee reviews your forms and asks questions. Despite the name, creditors rarely attend. If you have any non-exempt property, the trustee will ask that you turn it over to him or her. The meeting normally lasts only a few minutes.

If there are no challenges from creditors, approximately two months later, you receive a discharge order, which is a notice from the court that "all debts that qualified for discharge were discharged." Then, your case is over.

Chapter 13 is also called "reorganization bankruptcy." You file most of the same forms as you file in Chapter 7, plus a proposed repayment plan, in which you describe how you intend to repay your debts over the next three to five years.

Some debts must be repaid in full; others, you pay only a percentage while others aren't paid at all. Some debts you have to pay with interest, some are paid at the beginning of your plan, and some at the end. A bankruptcy trustee is assigned to oversee the case and handle your payments.

You will attend the First Meeting of Creditors about six to seven weeks after you file. If the trustee is satisfied with your payment plan, he or she will recommend its approval by the judge. A few weeks after the First Meeting of Creditors, the judge normally confirms (approves) your plan if no creditor opposes it and the trustee has recommended it.

When a creditor or the trustee objects to a plan, the judge usually holds a hearing within a few months to determine whether your plan should be approved over the objection. It is also possible for you to resolve the objection before the judge's hearing by amending the plan to satisfy the objection.

If your plan is confirmed, and you make all the payments called for under your plan, you will receive a discharge of any balance owed on all dischargeable debts at the end of your case.

You should consult with an attorney to decide which type of bankruptcy makes sense for you.

What happens if I file a Chapter 7 bankruptcy?

You begin a Chapter 7 bankruptcy by filing a petition with the bankruptcy court. In this petition, you are required to disclose to the court all your property, debts, income, and expenses. 

You must also turn over all non-exempt property to the bankruptcy trustee, who then converts it to cash for distribution to the creditors. The debtor then receives a discharge of all dischargeable debts. You should work with an attorney to find out which assets you can keep and what debts can be discharged.

When is the best time to file a chapter 7 bankruptcy?

The answer depends on the status of your dischargeable debts, the nature and status of your non-exempt assets, and the actions taken or threatened to be taken by your creditors.

Here are some chapter 7 dos and don'ts:

  • Do not file under Chapter 7 until all anticipated debts have been incurred because it will be another six years before you are again eligible for a Chapter 7 discharge. For example, a debtor who has incurred substantial medical expenses should not file under Chapter 7 until the illness or injury has either been cured or covered by insurance. It will do little good to discharge, say, $50,000 of medical debts now, and then incur another $50,000 in medical debts in the next few months.
  • Do not file under Chapter 7 until you have received all non-exempt assets to which you may be entitled. If you are entitled to receive an income tax refund or a similar nonexempt asset in the near future, do not file under Chapter 7 until after the refund or asset has been received. Otherwise, the refund or asset may become the property of the trustee.
  • Do not file under Chapter 7 if you expect to acquire property through inheritance, life insurance, or divorce in the next 180 days because the property will have to be turned over to the trustee unless it is exempt.
  • If a lawsuit threatens your exempt assets or future income, do file the case immediately to take advantage of the automatic stay that accompanies the filing of a Chapter 7 case.
  • If a creditor has threatened to attach or garnish your wages or bank account, do file immediately in order to protect your interest in the property.

What are reasons to file Chapter 7 bankruptcy?

You are not required to state a reason for filing bankruptcy, but the most common reasons for consumer bankruptcy are often beyond the control of the individual debtor. 

They include unemployment, large medical expenses, marital problems, family crisis, overextended credit, failure of a business due to economic conditions, and unexpected expenses.

Are there debts that are not dischargeable in Chapter 7?

Yes. The following categories of debt are generally not dischargeable:

  • Debts or creditors not listed on the schedules filed in a case where the trustee collects non-exempt assets to pay creditors
  • Most student loans, unless repayment would cause the debtor and his/her dependents undue hardship
  • Recent federal, state, and local taxes
  • Child support and spousal maintenance (alimony)
  • Government-imposed restitution, fines, or penalties
  • Court fees
  • Debts resulting from driving while under the influence of alcohol or drugs
  • Debts not dischargeable in a prior bankruptcy because of the debtor's fraud
  • Debts from fraud, including certain debts for luxury goods or services incurred within sixty days before filing and certain cash advances taken within sixty days of filing
  • Debts from willful and malicious acts
  • Debts from embezzlement, larceny, or breach of fiduciary duty
  • Debts from a divorce settlement agreement or court decree

Can a Chapter 7 case be converted to Chapter 13?

A pending Chapter 7 case may be converted to Chapter 13 at any time prior to discharge if the court approves a motion to convert.

Can I keep my home if I have a mortgage?

One of the biggest concerns you may have in considering bankruptcy is the possibility of losing your home.

If you are behind on your mortgage payments, you will almost certainly lose your house if you file a Chapter 7 bankruptcy. Your mortgage lender will ask the bankruptcy court to lift the automatic stay to begin or resume foreclosure proceedings.

In a Chapter 13 bankruptcy, you will not lose your house if you immediately resume making the regular payments called for under your mortgage contract agreement and you repay your missed mortgage payments through your Chapter 13 plan.

If you are current on your mortgage payments, you will not lose your house if you file for Chapter 13 bankruptcy, as long as you continue to make your mortgage payments. In Chapter 7 bankruptcy, whether or not you will lose your house depends on the amount of equity you have in the property. This is known as the "homestead exemption."

In California, the homestead exemption on real or personal property you occupy, including a mobile home, boat, stock cooperative, community apartment, planned development, or condo, is as follows:

  • $75,000 if single and not disabled
  • $100,000 for families, if no other member has a homestead
  • $175,000 if over 65, blind, or disabled
  • $175,000 if 55 or older, single and earn under $25,000, or married and earn under $35,000, and creditors seek to force the sale of your home
  • Sale proceeds are exempt for six months after they are received, unless reinvested in another homestead

If your home equity is too large for you to keep your home in a Chapter 7 case, you may want to consider Chapter 13 instead so that you can develop a plan for repayment without selling the home.

Can I keep my home if I rent?

If you are current on your rent payments and file for bankruptcy, your landlord will not be notified. If you are behind on your rent when you file and your landlord has begun eviction proceedings, your landlord can come to the court to have your automatic stay lifted and complete the eviction.

Will I lose my car if I file for bankruptcy?

In Chapter 7, you can keep your vehicle if the equity in it fits within your bankruptcy exemptions. If the equity is greater than your exemptions, the Chapter 7 trustee can sell the vehicle to pay creditors. If there is a loan on the vehicle, you must maintain your contract payments to the lender or they may request court permission to repossess the vehicle.

In Chapter 13, you keep your vehicle, even if the equity in it exceeds your exemptions. If there is a loan on the vehicle, it can be restructured and repaid as part of the Chapter 13 payment plan. If you are behind on your vehicle loan payments, Chapter 13 will prevent the vehicle's repossession.

Leased vehicles normally have no equity and, therefore, you have no equity interest to exempt. However, payments must be made on time or the lessor will seek court permission to repossess the vehicle.

What is the role of the attorney for a consumer debtor in a Chapter 7 case?

Your attorney provides a full range of services throughout the bankruptcy process. In a Chapter 7 case, the attorney:

  • Analyzes the amount and nature of the debts you owe and determines the best remedy for your financial problems
  • Advises you of the relief available under both Chapter 7 and Chapter 13 of the Bankruptcy Code, and of the advisability of proceeding under each chapter
  • Assembles the information and data necessary to prepare the Chapter 7 forms for filing
  • Prepares the petitions, schedules, statements, and other Chapter 7 forms for filing with the bankruptcy court
  • Assists you in arranging your assets to enable you to retain as many of the assets as possible after the Chapter 7 case
  • Files the Chapter 7 petitions, schedules, statements, and other forms with the bankruptcy court and, if necessary, notifies certain creditors of the commencement of the case
  • If necessary, assists you in reaffirming certain debts, redeeming personal property, setting aside certain liens against exempt property, and otherwise carrying out the matters set forth in the debtor's statement of intention regarding secured debts
  • Attends the First Meeting of Creditors with you and appears with you at any other hearings on motions that may be held in the case
  • If necessary, prepares and files amended schedules, statements, and other documents with the bankruptcy court in order to protect your rights

How do I know the attorney's fee is fair?

The fee paid to an attorney representing a debtor in a Chapter 7 case must be disclosed to the bankruptcy court. The court will allow the attorney to charge and collect only a reasonable fee. In Chapter 7, your fee is collected before the case is filed because otherwise, it would be dischargeable in bankruptcy.