What Is a Chapter 7 Bankruptcy?

FT Contributor
A pen sits on top of a document labeled "chapter 7 bankruptcy."

In 2018, American household debt had collectively risen to a startling $13.21 trillion. Whether it’s medical debt, student loans, credit card balances, mortgages, or car loans, Americans are getting themselves into trouble with debt. When you file for bankruptcy, you’re essentially waving the white flag and declaring that your debt has become dangerous and you need help. Chapter 7 bankruptcy, also called liquidation bankruptcy or straight bankruptcy, is a way for struggling consumers to get out of this crushing debt and get a fresh start. However, it’s important to understand the pros and cons of Chapter 7 bankruptcy before you decide if it’s right for you.

If you qualify for Chapter 7 bankruptcy, you, the court system, your trustee, and creditors work together to help you discharge (or clear) some of your debt. However, it comes at a cost. Some creditors are willing to negotiate and forgive some of your debt while other debt is non-negotiable, such as spousal or child support.

You may be required to liquidate some of your non-exempt assets to pay off the rest of your debt. These assets can include your investment properties, jewelry, or stocks. Exempt assets can’t be legally liquidated, such as your retirement accounts. When creditors are satisfied, your debt is cleared but you now have a bankruptcy on your credit report and there are a few other drawbacks to the process that you should think about before filing.

Table of Contents

Pros and Cons of Chapter 7 Bankruptcy

If you’re overwhelmed by debt and considering filing for Chapter 7 bankruptcy, it’s important to weigh the pros and cons of this legal action first.


  • You’ll experience immediate debt relief upon completion.
  • The debt collectors that have been hounding you will disappear.
  • Your wages cannot be garnished as you’re going through the bankruptcy.
  • You can stop the cycle of debt and get a fresh start once the bankruptcy concludes.
  • You can prevent a foreclosure on your home.
  • You can pay other bills more easily when your debt disappears.
  • The assets you financed can’t be repossessed if you settle the bankruptcy with creditors.
  • You can regain access to credit and other banking essentials after some time.
  • If your credit score is low, it can bounce back quickly.


  • If your credit score is high, it can decrease dramatically.
  • You can only file bankruptcy once every eight years.
  • Chapter 7 bankruptcy only erases some of your debt but can’t help with student loans or child and/or spousal support.
  • You could lose sentimental or expensive property.
  • All debt collectors are notified when you file, which can include friends and family members if you owe them money.
  • Your cosigners (including friends and family members) are also liable for your debt.
  • If you sell off property right before filing, you can be charged with fraudulent transfers.
  • You must pay filing, counseling, and court fees, which can be expensive.

How Long Does a Chapter 7 Bankruptcy Take?

It can take three to four months from the time you file to the discharge of your debt. The process takes so long because there are many steps that you, the court system, and your creditors must take to resolve the bankruptcy. You must complete bankruptcy counseling before you file and you’re required to provide information on all debts to the court.

After you file a petition with the court, you’re assigned a trustee. You must attend a creditor meeting with your trustee and answer questions about your debts. Then, you’ll complete a financial management course before your debts can be discharged.

Not all debts are discharged, so you may still owe money to your creditors after the process is complete. Both the trustee and creditors have a right to file an objection against the debt discharge within 60 days after the creditor meeting. This objection is usually filed if the trustee or creditor feels the debtor is hiding assets. It delays the process because the bankruptcy can’t be filed until these issues are resolved.

How Long Does a Chapter 7 Bankruptcy Last?

Bankruptcies are public record and are included in your credit report. A Chapter 7 bankruptcy on your credit report makes you less attractive to potential lenders and negatively affects your credit score. A Chapter 7 bankruptcy stays on your credit report for 10 years and can make it hard for you to get approved for loans or credit cards during this time period.

How to File for Chapter 7 Bankruptcy

You’re required to complete a credit counseling session before you file for bankruptcy. This session informs you about other debt relief options to ensure you still feel the need to file for bankruptcy. You’re also required to pass a means test that’s filed with the court system before you can apply for bankruptcy. This test calculates your income and compares it to your area’s median income to confirm that you truly don’t have a way to get yourself out of debt.

If you still want to file for Chapter 7 bankruptcy and you qualify for this legal process, gather paperwork to prove your debts and financial situation. Some of the documents the court system may ask for when you file include:

  • Bank statements.
  • Credit card balance statements.
  • Pay stubs.
  • Information on medical bills you can’t pay.
  • Mortgage information.
  • Assets, including stocks and bonds.
  • Other debts you owe, such as student loans or child support payments.

Once you’ve gathered these documents, you’ll file them, along with your bankruptcy application, with the court. You must pay a filing fee, which varies by state. If you’ve hired an attorney to assist you with the process, your attorney will file for you. After you’ve attended the creditor meeting, you may be ordered to attend a financial management course before the debt discharge is complete.

Alternatives to Chapter 7 Bankruptcy

Since chapter 7 bankruptcy is associated with several drawbacks, consider some alternatives before filing, such as:

  • Debt consolidation: Consolidate your debts into one that you can focus on paying off.
  • Debt settlement: When you’re in a bind, creditors may be willing to work with you by offering lower monthly payments to ensure you can pay off your debt.
  • Credit counseling: A financial professional can help you create an effective plan to pay off your debts.
  • Selling assets: If you have assets, consider selling them yourself and using the money to pay off your debts.

While Chapter 7 bankruptcy can help you gain a fresh start and a clean slate, it also negatively affects your credit score and will force you to liquidate some of your assets. Before you file for bankruptcy, think about alternatives for getting yourself out of debt and ensure you make the right decision for your financial future.

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