Chapter 7 bankruptcy

Chapter 7 bankruptcy, often called "liquidation bankruptcy," is a federal legal process that eliminates most unsecured debts and gives individuals a financial fresh start. It is the most common type of consumer bankruptcy filed in the United States.

74 steps across 12 sections

1. How the Means Test Works

  • If your income is BELOW the state median: You automatically pass the means test. No further calculation needed.
  • If your income is ABOVE the state median: Proceed to Step 2.

2. What Counts as "Income" for the Means Test

  • Wages, salary, tips, bonuses, commissions
  • Self-employment income
  • Rental and investment income
  • Pension and retirement income
  • Unemployment compensation
  • Workers' compensation
  • Child support and alimony received
  • Regular contributions from others (e.g., household member contributions)

3. Phase 1: Pre-Filing Preparation

  • Must complete an approved credit counseling course within 180 days before filing
  • Course covers budgeting, debt management alternatives, and whether bankruptcy is the right option
  • Takes approximately 1 hour
  • Can be completed online, by phone, or in person
  • Cost: $10-$50 (fee waivers available for low-income filers)
  • Must use a provider approved by the U.S. Trustee Program
  • You will receive a certificate of completion — this must be filed with your petition
  • Last 2 years of federal and state tax returns
  • Last 6 months of pay stubs or proof of income
  • Bank statements (all accounts, last 6 months)

4. Phase 2: Filing

  • Petition (Official Form 101): Basic information about you
  • Schedule A/B: Property you own
  • Schedule C: Property you claim as exempt
  • Schedule D: Secured debts (mortgage, car loan)
  • Schedule E/F: Unsecured debts (credit cards, medical bills)
  • Schedule I: Current income
  • Schedule J: Current expenses
  • Statement of Financial Affairs (Form 107): Financial history for past 2 years
  • Means Test Form (Form 122A): Income eligibility calculation
  • Credit counseling certificate

5. Phase 3: Post-Filing

  • A Chapter 7 trustee is assigned to your case
  • The trustee reviews your petition and schedules
  • The trustee's job is to identify any nonexempt assets that can be sold to pay creditors
  • Required hearing, typically lasting 5-10 minutes
  • Held at the bankruptcy court or federal building (some courts allow phone/video)
  • The trustee asks questions under oath about your finances, assets, and petition
  • Creditors may attend and ask questions (rarely do)
  • You must bring valid photo ID and proof of Social Security number
  • Your attorney will attend with you
  • Must complete a second approved course (different from pre-filing counseling)

6. Course 1: Pre-Filing Credit Counseling

  • When: Within 180 days before filing
  • Purpose: Explore alternatives to bankruptcy
  • Duration: ~1 hour
  • Cost: $10-$50 (fee waivers available)
  • Format: Online, phone, or in-person
  • Provider: Must be approved by U.S. Trustee Program (list at justice.gov)
  • Delivers: Certificate of completion (required to file)

7. Course 2: Post-Filing Debtor Education (Financial Management)

  • When: Within 60 days after 341 meeting of creditors
  • Purpose: Build financial management skills for post-bankruptcy life
  • Duration: ~2 hours
  • Cost: $15-$50
  • Format: Online, phone, or in-person
  • Provider: Must be approved by U.S. Trustee Program
  • Delivers: Certificate (required for discharge to be granted)

8. Key Exemption Categories Beyond Home and Vehicle

  • Retirement accounts (401k, 403b, pension): Protected in ALL states (federal law via ERISA)
  • Social Security benefits: Fully exempt in all states
  • Clothing and household goods: Most states protect reasonable amounts
  • Tools of the trade: Most states exempt tools needed for your job
  • Public benefits: Unemployment, disability, veterans' benefits generally exempt
  • Wildcard: Some states offer a "wildcard" exemption applicable to any property

9. Federal vs. State Exemptions: Which to Choose?

  • Choose federal if: you have limited home equity but significant personal property or cash
  • Choose state if: you have substantial home equity (especially in unlimited homestead states)
  • You cannot mix federal and state exemptions — you must choose one system entirely

10. When CAN Old Tax Debts Be Discharged?

  • The tax return was due more than 3 years before filing bankruptcy
  • The tax return was actually filed more than 2 years before filing
  • The tax was assessed more than 240 days before filing
  • The return was not fraudulent
  • You did not willfully attempt to evade the tax

11. Student Loan Discharge: The "Undue Hardship" Standard

  • You cannot maintain a minimal standard of living if forced to repay
  • Your financial situation is likely to persist for a significant portion of the repayment period
  • You have made good-faith efforts to repay (including exploring income-driven repayment plans)

12. Filing Fee Waivers and Installments

  • Installment payments: You can request to pay the $338 fee in up to 4 monthly installments
  • Fee waiver: Available if your income is below 150% of the federal poverty line
  • Attorney fee payment plans: Many attorneys offer payment plans; fees must be paid before filing

Common Mistakes

  • Running up credit card debt before filing
  • Paying back family or friends before filing
  • Transferring assets
  • Failing to list all debts
  • Not completing credit counseling in time

Pro Tips

  • Wait for tax refund:
  • Income timing:
  • Pending lawsuits:
  • Year-end timing:
  • Maximize exemptions:

Sources

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