How to Choose the Right Bankruptcy Chapter: When Chapter 7 Makes Sense

By Cara O'Neill, Attorney
Chapter 7 bankruptcy might be right for you if your income is low; if your debts are the type that will be wiped out; and if you don't own a lot of property.

When people consider filing bankruptcy, they naturally would like the whole thing over as fast as possible. No one wants to pay into a three- to five-year repayment plan unless it’s necessary. Fortunately, if you file for Chapter 7 bankruptcy, you don’t have to, because unlike Chapter 13 bankruptcy, you aren’t required to make payments to your creditors. If you’re eligible, you get to keep, or “exempt,” property, such as a simple car and household belongings. When your bankruptcy is over, your nonpriority, unsecured debts—such as credit card balances, medical bills, personal loans, and overdue utility bills—get wiped out, or “discharged.” Even so, Chapter 7 bankruptcy might not provide the solution you need.

Here are some factors to help you decide whether Chapter 7 bankruptcy is the right choice for you.

Your Income Qualifies You for Chapter 7 Bankruptcy

To be eligible for a Chapter 7 discharge, your income must be below your state’s median income for a household of your size. . You can determine whether you are qualified by taking the “means test”—a test that analyzes your income after allowing you to subtract certain deductions. If your income is under your state’s median income for your household size, you pass the test and are qualified to file for this chapter.

You’re Broke After You Pay Monthly Living Expenses

Even if you pass the means test, you won’t qualify if you have money left over at the end of the month. It’s called “discretionary income,” and if you have it, the court will assume that you can use it to pay your creditors and will convert your case to a Chapter 13 bankruptcy. If you don’t have discretionary income, Chapter 7 bankruptcy is likely the better chapter for you. In fact, you probably won’t qualify for a Chapter 13 bankruptcy because you must have enough discretionary income to fund a monthly repayment plan.

You Don’t Have Many Belongings

In Chapter 7 bankruptcy, you’re only allowed to keep, or “exempt,” a modest amount of property. The bankruptcy trustee sells any additional property you own—called “nonexempt” property—and distributes the proceeds to your creditors. You can check your state’s exemption laws to find out how much exempt property you’re entitled to keep. If you can keep everything (which is the case for many people), Chapter 7 might be the right bankruptcy type for you.

You Can Afford Your House and Car Payments (or Will Let Them Go)

As long as you’re current on your house or car payment—called “secured” debts because the creditor can take back the property you bought—and you’re able to continue making the payments after filing for Chapter 7 bankruptcy, you can keep your house, car, or both. However, if you’re behind on a secured debt before you file for Chapter 7 bankruptcy, you stand to lose the property. The creditor can ask the court to lift the “automatic stay”—the order that prevents creditors from collecting from you during bankruptcy—and, if successful, force you to return the property. So Chapter 7 will be a good choice only if you’re current on your property payments, or are willing to give the property back to the creditor.

Your Debts Are Dischargeable

Not all debts get wiped out, or “discharged,” in bankruptcy. Certain debts—such as income taxes, family support obligations, and student loans—stick around until you pay them off (more on this below). If you have this type of debt, called “nondischargeable debt,” you’ll want to consider Chapter 13 before filing for bankruptcy.

On the other hand, if your debt consists of a collection of outstanding credit card balances, medical bills, personal loans, unsecured judgments, and overdue utility bills, then you’re in luck. Chapter 7 bankruptcy discharges those debts.

Chapter 13 Bankruptcy Might Be Better a Better Option

There is no “one size fits all” solution in bankruptcy. Your particular obligations create a unique financial picture. For example, you don’t hit the bankruptcy jackpot by qualifying for Chapter 7 bankruptcy when you want to stay in a house in foreclosure. In fact, it’s likely that a Chapter 7 bankruptcy won’t help you at all. The better choice might be to bring your mortgage current over time using a Chapter 13 repayment plan.

Making a mistake about the type of bankruptcy to file has serious consequences. If you’re not sure which chapter is right for you, consider consulting with a knowledgeable bankruptcy attorney in your locality. To find out more about whether filing for Chapter 13 might be the better choice, see How to Choose the Right Bankruptcy Chapter: When Chapter 13 Makes Sense.

Questions for Your Attorney

  • Do I qualify to file for Chapter 7 bankruptcy?
  • Will all of my debts be discharged if I file for Chapter 7 bankruptcy?
  • Would filing for Chapter 13 bankruptcy be the better choice for me?
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