What Is Chapter 7 Bankruptcy?
Chapter 7 is a liquidation bankruptcy — but don’t let that word scare you. For most people who file, it means something much simpler: your debts get wiped out, and you keep everything you own.
Here’s how it works. Chapter 7 eliminates your dischargeable debts (credit cards, medical bills, personal loans) and allows the bankruptcy trustee to sell any assets that aren’t protected by exemptions. In practice, the vast majority of Chapter 7 filers have no non-exempt assets at all — which means the trustee sells nothing, and you walk away debt-free.
What Are Bankruptcy Exemptions — and Why Do They Matter?
Exemptions are the laws that protect your property in bankruptcy. Every asset you own — your home, car, furniture, clothing, retirement accounts, artwork — must be listed on your bankruptcy petition. Exemptions let you shield certain assets, up to a specified value, so you can keep them after you receive your discharge.
You have two choices: use the federal exemptions under the U.S. Bankruptcy Code, or use your state’s exemptions. You cannot mix and match. Pick whichever set gives you the greater protection and stick with it.
Home Equity: The Homestead Exemption
Federal exemption: Under the Bankruptcy Code, you can protect up to $31,575 in home equity. If you’re filing jointly with your spouse, some states allow that amount to double.
Example: Your home is worth $295,000 and you owe $279,000 — that’s $16,000 in equity. You’re well within the federal limit, so your home is protected as long as you keep making mortgage payments.
California homestead exemption: California’s exemption is far more generous, ranging from $371,840 to $743,681, depending on the county where your home is located (CA Code of Civil Procedure §704.730 et seq.). To claim the full exemption, you must have owned and occupied the home for at least 1,215 days (roughly 3½ years) before filing.
Critical rule, regardless of which state you’re in: You must be living in the home on the day you file your bankruptcy petition to claim the homestead exemption.
Other Common Exemptions (Federal)
| Asset | Federal Exemption Amount |
|---|---|
| Vehicle equity | $5,025 |
| Household goods | $800/item; $16,850 total |
| Qualified retirement accounts (401k, IRA) | Unlimited |
These amounts are adjusted periodically for cost of living. Retirement accounts — 401(k)s, IRAs, pensions — are almost always fully protected.
The Means Test: Do You Qualify for Chapter 7?
Before exemptions even matter, you must qualify to file Chapter 7. The most important hurdle is the means test, which compares your income to the median income in your state. If your income is too high, you may not be eligible for Chapter 7 and may need to consider Chapter 13 instead.
You can find the official means test forms and calculator on the U.S. Courts website: Chapter 7 Means Test Forms — uscourts.gov
Getting Exemptions Right Takes Experience
Listing your assets, calculating exempt amounts, choosing the right exemption scheme, and citing the correct federal or state code — it’s more complex than it looks, and mistakes can be costly. This is exactly where an experienced bankruptcy attorney earns their fee.
Ready to find out what you’d keep in a Chapter 7? Email me at martha@bankruptcysage.com for a free consultation. I’ll give you a straight answer — no pressure, no jargon.