Bankruptcy can be a tough decision to make, but for those who are struggling with overwhelming debt, it can provide a fresh start. One of the most common types of bankruptcy is Chapter 7, which is also known as a “liquidation” bankruptcy. In this article, we’ll explore the pros and cons of filing for Chapter 7 bankruptcy and what you need to consider before making a decision.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a legal process that allows individuals or businesses to eliminate most unsecured debts such as credit card debt, medical bills, and personal loans. In exchange for debt relief, the debtor’s non-exempt assets are sold, and the proceeds are used to pay off creditors. However, most states have exemptions that allow debtors to keep some of their property, such as a primary residence, vehicle, or household goods.
Pros of Filing for Chapter 7 Bankruptcy
Filing for bankruptcy may have many benefits, including:
Debt Relief
The most significant benefit of filing for Chapter 7 bankruptcy is that it provides debt relief. Once the bankruptcy is discharged, the debtor is no longer obligated to pay the discharged debts, which can provide a fresh start.
Quick Process
Chapter 7 bankruptcy is usually a quick process compared to other types of bankruptcy. In most cases, the process can be completed in four to six months.
Automatic Stay
Once the bankruptcy is filed, an automatic stay goes into effect, which prohibits creditors from attempting to collect debts. This can provide temporary relief from collection calls and lawsuits.
No Repayment Plan
Unlike Chapter 13 bankruptcy, which requires debtors to repay a portion of their debts through a repayment plan, Chapter 7 bankruptcy does not require a repayment plan.
No Tax Consequences
Discharged debts in Chapter 7 bankruptcy are not considered taxable income by the IRS, which means debtors will not have to pay taxes on the discharged debts.
Cons of Filing for Chapter 7 Bankruptcy
The following could be considered negative aspects of bankruptcy:
Credit Score Impact
Filing for Chapter 7 bankruptcy can have a significant negative impact on your credit score. A bankruptcy filing can remain on your credit report for up to ten years.
Loss of Property
In Chapter 7 bankruptcy, the debtor’s non-exempt assets are sold to pay off creditors. This means that debtors may lose valuable assets such as a second home or valuable personal property.
Limited Eligibility
Not everyone is eligible to file for Chapter 7 bankruptcy. There are income limits and a means test that must be passed to qualify for Chapter 7 bankruptcy.
Negative Perception
Filing for bankruptcy can have a negative perception in society (source). Some people may view it as a sign of financial irresponsibility, which can have an impact on future job prospects or loan applications.
Discharge Limitations
Not all debts can be discharged in Chapter 7 bankruptcy (see here). Debts such as student loans, child support, and certain taxes cannot be discharged through Chapter 7 bankruptcy.
What to Consider Before Filing for Chapter 7 Bankruptcy
Before making the decision to file for Chapter 7 bankruptcy, there are several factors that debtors should consider. These include:
Eligibility
As mentioned earlier, not everyone is eligible to file for Chapter 7 bankruptcy (see . Debtors must pass a means test and meet certain income requirements to qualify for Chapter 7 bankruptcy.
Assets
Debtors should evaluate their assets to determine what may be exempt and what may be sold to pay off creditors. This can help debtors determine whether Chapter 7 bankruptcy is the right choice for them.
Debts
Debtors should also evaluate their debts to determine which debts can be discharged in Chapter 7 bankruptcy and which debts cannot be discharged. Debts such as student loans, child support, and taxes cannot be discharged through Chapter 7 bankruptcy.
Credit Score
Debtors should consider the impact that filing for Chapter 7 bankruptcy will have on their credit score. While a bankruptcy filing can provide debt relief, it can also have a significant negative impact on credit scores.
Alternative Options
Debtors should consider alternative options such as debt consolidation, debt settlement, or a repayment plan through Chapter 13 bankruptcy before making the decision to file for Chapter 7 bankruptcy.
How to File for Chapter 7 Bankruptcy
If you decide that filing for Chapter 7 bankruptcy is the right choice for you, the first step is to hire a bankruptcy attorney. An attorney can help you navigate the complex legal process and ensure that your bankruptcy filing is successful.
The next step is to complete the required bankruptcy forms, which include a petition for bankruptcy, schedules of assets and liabilities, a statement of financial affairs, and a means test calculation. These forms must be filed with the bankruptcy court along with a filing fee.
Once the bankruptcy is filed, an automatic stay goes into effect, which prohibits creditors from attempting to collect debts. The bankruptcy trustee will review your case and determine which assets are exempt and which assets will be sold to pay off creditors.
After the trustee sells any non-exempt assets, the proceeds are used to pay off creditors. Any remaining unsecured debts are discharged, and the bankruptcy case is closed.
Chapter 7 bankruptcy can provide much-needed debt relief for those who are struggling with overwhelming debt. However, it is important to carefully consider the pros and cons before making the decision to file for bankruptcy. According to Bogin Munns discuss your case with a bankruptcy lawyer and explore alternative options before deciding to file for Chapter 7 bankruptcy.