Bankruptcy Law

Pros and Cons of Chapter 7 Bankruptcy

Key Takeaways:

  • Chapter 7 bankruptcy can discharge most of your debts.
  • You can keep some of your property after filing for Chapter 7 liquidation.
  • A bankruptcy will stay on your credit report for years to come.

If you’re struggling with debt, Chapter 7 bankruptcy can be an effective way to get a fresh start. In many cases, it may be possible to have eligible debts discharged within months of filing, including credit card debt, medical bills, and personal loans. Bankruptcy can give you a clean slate, but it will also stay on your credit report for up to 10 years.

Before filing, talk to an experienced bankruptcy attorney about the pros and cons of Chapter 7 bankruptcy proceedings.

Advantages of Chapter 7 Bankruptcy

There are pros and cons of filing for Chapter 7 bankruptcy. It is essential to understand the upsides and downsides of the U.S. Bankruptcy Code before you decide to seek debt relief through bankruptcy. Here are some of the advantages of filing for Chapter 7.

Put a Stop to Debt Collectors

When filing for Chapter 7 bankruptcy, the bankruptcy court issues an automatic stay on collection actions, including wage garnishment, foreclosure, and repossession. Creditors are generally not allowed to make contact with you. This means they cannot call, write, or inquire about a debt. If a creditor or debt collector has questions about a debt or its status, they must generally contact your attorney or other representative.

Discharges Nearly All Debts

Nearly all unsecured debts, such as credit card or medical bill balances, can be eliminated by filing for liquidation bankruptcy. It may also be possible to eliminate a judgment against you by filing for this type of bankruptcy.

Formal or informal debts owed to friends, family members, or employers may also be eliminated by filing for Chapter 7 bankruptcy.

Retain Some Property

When you file for Chapter 7 bankruptcy, a bankruptcy trustee will conduct an inventory and sell any non-exempt assets through liquidation. However, federal and state laws generally protect certain property types with bankruptcy exemptions. For example, under federal bankruptcy exemptions, you can exempt up to $27,900 of value in your home under the homestead exemption.

Disadvantages of Chapter 7 Bankruptcy

There are downsides to filing for Chapter 7 bankruptcy. For some people, filing for bankruptcy under Chapter 13 may be a better option, but this is a conversation that you should have with your attorney.

Damage to Credit

Before filing for bankruptcy, you should consider that it may lower your credit score by 50, 100, or even 200 points. The exact number depends on your credit score before filing. It may be harder to get a credit card, rent an apartment, or obtain a mortgage for years after filing.

A Chapter 7 bankruptcy will stay on your credit report for up to 10 years. This is longer than the seven years that all other information will remain on a credit report. You may have to explain your bankruptcy if you are applying for credit. You can still work to build your credit after filing, however. Even if you can’t get a regular line of credit, you can get a secured credit card to start a new credit history.

You May Not Qualify

While most people may qualify for bankruptcy protection, it may not be Chapter 7 bankruptcy. To qualify for Chapter 7, you must be filing as an individual, jointly with your spouse, or as a sole proprietor with personal liability for business debts.

You cannot file for Chapter 7 protection if you already filed Chapter 7 in the past eight years. The same is true if you have had a Chapter 7 case dismissed within the last 180 days or a Chapter 13 discharge within the past six years.

Depending on how much you make per year, you might have to pass a means test before filing. In addition to yearly income, the court may determine whether you have sufficient assets to sell or other ways to pay your debts without getting a discharge through bankruptcy.

What Debts Are Not Discharged?

Not all types of debts will not go away even if a person files for bankruptcy. For instance, income taxes under three years old cannot be discharged in bankruptcy. The same is generally true for alimony or child support payments. For most filers, student loan debts are non-dischargeable.

Most secured debts are not eligible for discharge in a Chapter 7 case, as the lender still has a property interest in the asset. However, filing for bankruptcy may provide time to come to new loan terms. You can reaffirm your promise to continue making payments. If that doesn’t work, it may be necessary to file for Chapter 13 bankruptcy instead and pay off debts with a repayment plan.

If you don’t believe you can repay your debts in the next three to five years, you may be best served by filing for bankruptcy. However, it would help to talk with a bankruptcy attorney or a financial adviser before deciding.

After you consider some of the pros and cons of filing for Chapter 7 bankruptcy, you should better understand how it can work in your financial situation. An experienced bankruptcy attorney can help you through the bankruptcy process and decide if it is right for you. Talk to a bankruptcy lawyer about your case.

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