Chapter 7 bankruptcy is a federal liquidation proceeding, designed to give honest debtors a fresh financial start.

Chapter 7 is the most common form of personal bankruptcy. It is a liquidation proceeding under the federal Bankruptcy Code (11 U.S.C. §§ 701-784) administered in the United States Bankruptcy Court for the District of New Jersey. The mechanics: (1) The debtor files a petition listing all assets, debts, income, expenses, and recent financial history (the 'schedules'). (2) The automatic stay under 11 U.S.C. § 362 immediately stops all collection actions: phone calls, lawsuits, wage garnishments, foreclosure (with exceptions), repossession. (3) A Chapter 7 trustee is appointed. The trustee's job is to identify any non-exempt property the debtor owns and administer it for creditors. Most consumer Chapter 7s are 'no-asset' cases: the debtor owns nothing the trustee can administer because exemptions cover everything. (4) The 341 Meeting of Creditors is held approximately 30-45 days after filing. The trustee asks the debtor questions under oath; creditors may appear but in consumer cases rarely do. (5) Approximately 60-90 days after the 341 meeting, the discharge order issues under 11 U.S.C. § 727, eliminating personal liability on the discharged debts. Total time: four to six months for routine consumer Chapter 7. To qualify, the debtor must pass the means test under 11 U.S.C. § 707(b). The means test compares the debtor's income to the median income for the household size in New Jersey; debtors below median automatically qualify, debtors above median must run a deeper analysis of disposable income to demonstrate inability to pay meaningful unsecured debt over five years. Business debtors (where more than half the debts are business-related) are not subject to the means test.

Most unsecured debt is discharged in Chapter 7. The discharge under 11 U.S.C. § 727 eliminates the debtor's personal liability on those debts; the debtor cannot be sued, garnished, or otherwise pursued for them after discharge. Discharged debts include: credit-card debt; medical bills; personal loans; deficiency balances on repossessed vehicles; old utility bills; most lawsuit judgments; payday loans; old rent; and most other general unsecured debt. Several categories of debt are NOT dischargeable under 11 U.S.C. § 523; they survive the bankruptcy and remain owed: (1) Student loans, with narrow exceptions for an 'undue hardship' showing under Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987), which is a high bar. Federal student-loan borrowers should also evaluate income-driven repayment plans and federal forgiveness programs before considering bankruptcy as the student-loan strategy. (2) Recent income taxes (generally, taxes due within the prior three years cannot be discharged; older taxes may be dischargeable on specific elements). (3) Child support and alimony (domestic support obligations). (4) Criminal fines and restitution. (5) Debts arising from fraud, embezzlement, or willful and malicious injury. (6) Debts not listed in the petition (the omitted-creditor problem). (7) Recent credit-card debt for luxury goods (presumption against discharge for purchases above a statutory amount in the 90 days before filing). The Chapter 7 analysis includes which debts are dischargeable and what alternatives exist for the non-dischargeable categories, particularly for tax debt (sometimes Chapter 13 helps where Chapter 7 doesn't) and student loans (income-driven repayment or specific federal forgiveness programs may be more impactful than bankruptcy).

The exemption analysis is central to Chapter 7. New Jersey debtors may elect either the federal exemptions under 11 U.S.C. § 522(d) or NJ state exemptions; the choice depends on the debtor's specific asset profile. For most consumer Chapter 7 cases the federal exemptions produce the better result. Federal exemptions include (figures adjusted periodically by the Judicial Conference): a homestead exemption that protects equity in a primary residence; a vehicle exemption that protects equity in one motor vehicle; a household-goods exemption that protects ordinary furniture and personal items (with per-item limits); a wildcard exemption that can be applied to any property; and a tools-of-the-trade exemption. NJ state exemptions are different: N.J.S.A. 2A:17-19 provides a relatively modest personal-property exemption with no homestead exemption. Retirement accounts are protected under federal law regardless of exemption election. Properly-structured 401(k) and 403(b) accounts under ERISA are not even property of the bankruptcy estate. IRA accounts (traditional and Roth) are exempt up to $1,711,975 under 11 U.S.C. § 522(n) (effective April 1, 2025; the cap adjusts every three years). Pension and similar retirement assets are protected. The pre-filing exemption planning is significant work: assessing the asset profile, electing the right exemption set, evaluating whether to take any asset-position actions before filing (with careful attention to the fraudulent-transfer rules, the 10-year lookback for nonexempt assets converted into homestead equity with intent to hinder creditors under 11 U.S.C. § 522(o), and the 1,215-day homestead cap under § 522(p)). Pre-filing asset transfers to avoid bankruptcy collection are dangerous; the trustee can unwind them under the avoidance powers, and intentional fraudulent transfers can result in denial of discharge under 11 U.S.C. § 727(a)(2). Filing without competent pre-filing planning can produce avoidable losses.

Chapter 7 and Chapter 13 are different bankruptcy chapters under the same federal Bankruptcy Code, with different mechanics and different appropriate uses. Chapter 7 is liquidation: debts are discharged in 4-6 months, the debtor surrenders any non-exempt property to the trustee for administration (usually nothing, in consumer cases), and the debtor emerges with most unsecured debts eliminated. Chapter 13 is reorganization: the debtor proposes a 3-5 year repayment plan that pays creditors based on the debtor's disposable income and the value of any non-exempt assets, then receives discharge of remaining unsecured debt at the end of the plan. Chapter 13 is preferred or required when: (1) The debtor's income exceeds the Chapter 7 means-test threshold. (2) The debtor wants to keep a house with a mortgage in default and needs to cure the arrears over time (the 'cramdown' under 11 U.S.C. § 1322 lets the debtor pay arrears over the plan term while maintaining current payments). (3) The debtor wants to keep a vehicle with a loan and the 910-day rule applies (cars financed within 910 days of filing must be paid at full contract terms in the plan). (4) The debtor has non-dischargeable debts (taxes, student loans, support arrears) that can be paid through the plan with the benefit of the automatic stay. (5) The debtor has assets that exceed exemption limits but wants to pay off the non-exempt portion through the plan rather than surrender the assets. Many cases are evaluated for both chapters at the consultation; the choice of chapter is one of the most important decisions in the case.

The automatic stay under 11 U.S.C. § 362 takes effect the instant the bankruptcy petition is filed and stops nearly all collection actions, including foreclosure, repossession, lawsuits, wage garnishments, and creditor phone calls. The stay applies regardless of which chapter is filed. The stay's effect on secured creditors (mortgage lenders, car lenders) is different from its effect on unsecured creditors. A secured creditor can request 'relief from stay' under 11 U.S.C. § 362(d) where the debtor is in default and the creditor's interest is not adequately protected. The bankruptcy court typically grants relief from stay within 60-90 days for a debtor in default on a secured obligation, at which point foreclosure or repossession can resume. To keep secured property in Chapter 7, the debtor typically must either: (1) Be current on the loan at the time of filing and stay current going forward (no arrears to cure). (2) Reaffirm the debt under 11 U.S.C. § 524(c), executing a new contract that survives discharge, making the debtor personally liable on the reaffirmed debt going forward, in exchange for keeping the property. Reaffirmation agreements require court approval. (3) Redeem the property by paying the lender the value of the collateral in a lump sum at the time of filing; this is possible for personal property but rarely available for real estate. (4) Negotiate a workout with the lender outside the bankruptcy process. Where the debtor has significant mortgage arrears or wants to cure a vehicle-loan default over time, Chapter 13 (not Chapter 7) is typically the chapter of choice: the Chapter 13 plan allows arrears to be paid over 36-60 months while the debtor maintains current payments.

Chapter 7 has a significant credit impact, but the long-term effect depends on the debtor's full credit profile and post-discharge behavior. The bankruptcy itself may be reported for up to 10 years from the filing date under the Fair Credit Reporting Act, 15 U.S.C. § 1681c1. Discharged accounts are generally marked 'discharged in bankruptcy' with $0 balances. Credit rebuilding usually turns on on-time payments, conservative utilization, stable income, and clean post-discharge reporting. Some debtors qualify for secured credit cards within months; mortgage eligibility depends on the loan program, waiting period rules, income stability, and rebuilt credit.