Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a proceeding under chapter 7 of title 11 of the United States Code, a chapter Congress titled Liquidation. Filing creates an estate, the United States trustee appoints an impartial case trustee under 11 USC 701 and 704 to administer it and liquidate any assets no exemption protects, unsecured creditors are paid from whatever that produces, and the court then discharges the debtor's remaining eligible debts. For an individual with ordinary consumer debts the whole thing usually takes a matter of months.

The word liquidation is the frightening part, and in most consumer cases it describes almost nothing that happens. The federal courts' own explanation puts it plainly: if all the debtor's assets are exempt or subject to valid liens, the trustee normally files a "no asset" report and there is no distribution to unsecured creditors, and "most chapter 7 cases involving individual debtors are no asset cases."

This page covers what is specific to this chapter: the gate that decides who may use it, how the liquidation actually works, and the elections a debtor has to make about property that secures a debt. The machinery every chapter shares, including the automatic stay that filing triggers, what exemptions do, why a discharge leaves liens standing, the two education requirements and how long you must wait to file again, is the subject of the bankruptcy page.

The gate is a presumption of abuse, not an income limit, and the distinction matters. Under 11 USC 707(b)(1) the court may dismiss a case filed by an individual debtor "whose debts are primarily consumer debts," or with the debtor's consent convert it to chapter 11 or 13, if it finds that granting relief "would be an abuse of the provisions of this chapter." Two details sit in that sentence. The screen reaches only debtors whose debts are primarily consumer debts, so a filer whose obligations are mostly business debt is outside it. And the same paragraph forbids the court from taking into account whether the debtor has made or continues to make charitable contributions to a qualified religious or charitable organization.

The means test is the arithmetic that creates the presumption. Section 707(b)(2)(A)(i) says abuse is presumed if the debtor's current monthly income, reduced by the amounts the statute allows, multiplied by 60, is not less than the lesser of two figures: 25 percent of the debtor's nonpriority unsecured claims in the case or a stated dollar amount, whichever is greater, or a second stated dollar amount. Both dollar amounts are adjusted every three years under 11 USC 104 and rounded to the nearest $25, and the Judicial Conference publishes them in the Federal Register. The amounts now in effect were set by a notice dated January 30, 2025, effective April 1, 2025, and are $10,275 for the first figure and $17,150 for the second, with the next adjustment due April 1, 2028. Section 104(c) adds a point that matters to anyone already filed: an adjustment does not apply to cases commenced before it took effect, so the figures that govern a case are the ones in effect on the day it was filed.

The deductions are prescribed rather than actual. Section 707(b)(2)(A)(ii) uses the Internal Revenue Service's National and Local Standards for most expense categories, with actual amounts for Other Necessary Expenses, and it excludes payments on debts from the expense figures. Secured debt payments and priority claims come in separately under (iii) and (iv), each averaged over 60 months.

Rebuttal is possible and narrow. Under 707(b)(2)(B) the presumption "may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces," and only to the extent those circumstances justify additional expenses or income adjustments for which there is no reasonable alternative. The debtor must itemize each item, document it, explain why it is necessary and reasonable, and attest to the accuracy under oath. And the rebuttal only works if the recomputed figure falls below the same threshold.

The safe harbor below median income is the provision that decides most cases, and it is worth reading in two halves. Under 707(b)(7), no judge, trustee, United States trustee or other party in interest may file a means-test motion at all where the debtor's current monthly income, combined with the spouse's, annualizes to at or below the applicable state median. The spouse's income counts whether or not the case is a joint one, and is left out only where the couple are separated or living apart other than to evade the provision and the debtor files a statement under penalty of perjury saying so. The medians are the median family income for one earner for a household of one, the highest median for a family of the same number or fewer for households of two to four, and for larger households the highest median for a family of four plus a stated amount per additional person. So below median the means test is not merely passed, it cannot be raised.

The other half is 707(b)(6), which is a different rule and often conflated with it. Below the same median, only the judge or the United States trustee may file a 707(b) motion of any kind. That leaves the route at 707(b)(3), which asks whether the petition was filed in bad faith or whether the totality of the circumstances demonstrates abuse, available at low income but only in those hands rather than a creditor's.

Two categories of debtor are outside means testing entirely. Under 707(b)(2)(D) the court may not dismiss or convert a case on any form of means testing where the debtor is a disabled veteran, as defined in title 38, whose indebtedness arose primarily while on active duty or performing a homeland defense activity; or, for a member of a reserve component or the National Guard called to qualifying active duty of at least 90 days after September 11, 2001, while on that duty and for 540 days afterward.

The elections on secured property are the part of a Chapter 7 case a debtor actually has to decide, and each has a deadline. Under 11 USC 521(a)(2)(A), where the schedules list debts secured by property of the estate, the debtor must file a statement of intention with respect to retaining or surrendering the property within thirty days of filing or by the date of the meeting of creditors, whichever is earlier, specifying whether the property is claimed as exempt and whether the debtor intends to redeem it or to reaffirm the debt. Under (a)(2)(B) the debtor must perform that intention within 30 days after the first date set for the meeting of creditors.

Each option is a different legal act. Surrender gives the property back and the discharge deals with any shortfall. Redemption under 11 USC 722 lets an individual debtor redeem tangible personal property intended primarily for personal, family or household use from a lien securing a dischargeable consumer debt, where the property is exempt or has been abandoned, by paying the holder "the amount of the allowed secured claim ... in full at the time of redemption." That is a lump sum, and it is the collateral's value rather than the balance, which is what makes it powerful and often impossible. Reaffirmation is an agreement to remain personally liable on a dischargeable debt, and 11 USC 524(c) surrounds it with conditions: it must be made before discharge, the debtor must have received the prescribed disclosures, it must be filed with the court, and where the debtor was not represented by an attorney the court must approve it as neither imposing an undue hardship nor being against the debtor's best interest. Section 524(c)(4) then gives a rescission right that is easy to lose track of: the debtor may rescind at any time before discharge or within sixty days after the agreement is filed with the court, whichever is later.

What the trustee actually does, and the timeline. The trustee reviews the schedules, asks the debtor questions at the meeting of creditors, and is required by the Code to make sure the debtor understands the consequences of seeking a discharge, including the effect on credit history and on the ability to file under a different chapter, and the effect of reaffirming a debt. Bankruptcy judges are prohibited from attending that meeting under 11 USC 341(c). Where assets exist, unsecured creditors must file claims within 90 days after the first date set for the meeting. Absent an objection to the discharge or a motion to extend the time to object, the court issues the discharge order "generally, 60 to 90 days after the date first set for the meeting of creditors." A debtor may also convert to chapter 11, 12 or 13 under 11 USC 706(a), provided the case has not previously been converted to chapter 7 from another chapter.

Court fees are payable at filing and may be paid in installments with the court's permission or waived for a qualifying debtor. The amounts are set by the Judicial Conference under 28 USC 1930(a) and change, so the current figures are worth reading on uscourts.gov rather than from any secondary source.

The debtor completes the required pre-filing briefing, files a petition with schedules, and pays the court fees or seeks installments or a waiver. The stay attaches on filing and a trustee is appointed. Within thirty days or by the meeting of creditors, the debtor files a statement of intention about property securing consumer debts, and performs it within 30 days after the first date set for that meeting. The trustee administers any non-exempt property or files a no-asset report. The debtor completes the post-filing financial management course. Absent an objection, the discharge follows within a few months.

A hypothetical example of the means test, because the order of the comparisons is easy to reverse. Assume Devon's household is above his state's median income, so the arithmetic actually runs.

His current monthly income is $6,200. The statutorily allowed deductions, including the Internal Revenue Service standards, his averaged secured debt payments and his priority claims, come to $5,900. So his monthly disposable income for this purpose is $300, and over sixty months that is $18,000 ($300 × 60).

Now the two thresholds. His nonpriority unsecured claims total $40,000, and 25 percent of that is $10,000. The first limb is the greater of that figure and $10,275, which is $10,275. The second limb is $17,150. The statute compares his $18,000 against the lesser of the two, which is $10,275. Since $18,000 is not less than $10,275, abuse is presumed, and Devon can only rebut it by documenting special circumstances that pull the recomputed figure below that line.

Change one fact and the whole calculation disappears. Annualized, his income is $74,400 ($6,200 × 12). Had that been at or below the applicable median for his household size, 707(b)(7) would have barred every party from filing the means-test motion in the first place, and none of the arithmetic above would ever have been performed.

Pros

• It is fast. The discharge generally arrives within a few months of the meeting of creditors rather than after years of payments.
• Most individual cases are no-asset cases, so the liquidation the chapter is named for frequently involves selling nothing at all.
• Below the applicable state median income, no party may file a means-test motion, so the screen is not merely passed but unavailable.
• Certain disabled veterans and qualifying reservists and Guard members are outside means testing altogether.
• Redemption under 11 USC 722 lets a debtor keep tangible personal property by paying the collateral's value rather than the balance.
• A reaffirmation can be rescinded before discharge or within sixty days of its filing, whichever is later, which is a genuine second look.

Cons

• Property no exemption protects can be sold, and the exemption rules depend on the state and on which set applies.
• Above the median, the means test uses prescribed expense standards rather than actual spending, so a household can fail it while feeling unable to pay.
• Rebutting the presumption requires documented special circumstances and only works if the recomputed figure clears the same threshold.
• The two dollar thresholds are adjusted every three years, and the ones that govern a case are those in effect when it was filed.
• Redemption requires a lump sum, which is often the one thing the debtor does not have.
• Reaffirming puts personal liability back on a debt that would otherwise have been discharged, which is a permanent decision made under time pressure.