How Chapter 7 Bankruptcy Works

Chapter 7 bankruptcy — often called "liquidation" bankruptcy — wipes out most unsecured debt like credit cards, medical bills, and personal loans, typically within four to six months of filing. Despite the "liquidation" label, most people who file keep everything they own, because state and federal exemptions protect the property most filers actually have.

Who qualifies

Eligibility runs through a "means test": if your household income is below your state's median for a household your size, you generally qualify automatically. If it's above median, you may still qualify if your allowed expenses bring your disposable income below a set threshold. Otherwise you'd need to file Chapter 13 instead. You also can't have received a Chapter 7 discharge within the past eight years.

What gets discharged

Chapter 7 eliminates most unsecured debt: credit card balances, medical bills, personal loans, and old utility bills are the most common examples. Once the case is discharged, creditors can no longer legally attempt to collect on those debts at all.

What doesn't get discharged

Most student loans survive Chapter 7 except in narrow cases where a separate court proceeding proves "undue hardship," which is a high bar. Recent tax debt, child support, alimony, most court fines, and debts arising from fraud also generally aren't dischargeable.

Why "liquidation" doesn't usually mean losing everything

Every state (and, in some states, an alternative federal exemption scheme) lets you protect a certain amount of property from being sold to pay creditors, often including home equity up to a limit, a vehicle, retirement accounts, and tools you use for work. Because most people who file don't have assets beyond these exemptions, the large majority of Chapter 7 cases involve no property being sold at all.

The process, step by step

Before filing, you're required to complete a credit counseling course. Once you file the petition and financial schedules, an automatic stay immediately stops most collection calls, wage garnishments, and lawsuits. A trustee reviews your case and holds a short "meeting of creditors," and if there's no non-exempt property to sell, the discharge typically follows 60 to 90 days after that meeting.

What happens to your credit afterward

A Chapter 7 filing stays on your credit report for up to 10 years, which sounds worse than it usually plays out. Many filers see their credit scores start recovering within 12 to 24 months, since they're no longer carrying the discharged debt and can rebuild with on-time payments going forward.

Frequently asked questions

Will I lose my house or car if I file Chapter 7?

Usually not, as long as any equity you have falls within your state's exemption and you're current on the payments (or you reaffirm the debt with the lender). Losing exempt property is the exception, not the norm.

How much does it cost to file Chapter 7?

The court filing fee is a few hundred dollars, and attorney fees commonly run $1,000 to $2,000, though fee waivers for the court cost are available for very low-income filers.

Can I file Chapter 7 more than once?

Yes, but there's an eight-year waiting period between Chapter 7 discharges.

Does filing Chapter 7 stop wage garnishment?

Yes. The automatic stay that takes effect the moment you file halts most wage garnishments and other collection actions right away.

Do I need a lawyer to file Chapter 7?

It's not legally required, but the exemption calculations and paperwork have real consequences if done wrong, so most filers use a bankruptcy attorney rather than go it alone.

Will Chapter 7 get rid of my student loans?

Very rarely. Discharging student loans requires a separate "adversary proceeding" proving undue hardship, and courts set that bar high.

This guide is general information, not legal advice. Read our legal disclaimer before relying on anything here for your own situation.