Advantages and Disadvantages of Chapter 7 Bankruptcy

By Christie Nicholson, J.D. | Legally reviewed by Susan Mills Richmond, Esq. | Last reviewed June 07, 2024

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Deciding whether to declare bankruptcy is complicated. It affects your future credit, your reputation, and your self-image. At the same time, if you wait too long to decide, your financial situation may worsen. Your monthly income may not be sufficient to make your monthly payments.

While filing Chapter 7 or Chapter 13 bankruptcy can be scary, it can also improve your quality of life. Creditors and collection agencies will stop calling and writing to you. Your credit score may stop going down each month.

Chapter 7 bankruptcy, in particular, may damage your credit for a while, but it also provides much-needed relief and a roadmap for getting your finances in order.

Here, we'll discuss the pros and cons of filing a Chapter 7 bankruptcy case. We'll also explain what you should consider before making your final decision. If you still have questions about whether to file Chapter 7 bankruptcy, you should contact a bankruptcy law attorney.

Types of Bankruptcy

There are three main types of bankruptcy available. The type you file will depend on your financial affairs. It also depends on whether you're looking for a fresh start without a payment plan or wish to pay back your debts with the help of the U.S. bankruptcy courts.

There are three options under bankruptcy:

  • Chapter 7 bankruptcy is a bankruptcy option for individual debtors. It allows you to wipe out most unsecured debt and retain some of your valuable possessions.
  • Chapter 13 bankruptcy allows personal debtors the chance to repay their debts over time. These repayment plans are three to five years.
  • Chapter 11 bankruptcy is similar to Chapter 7 but generally for businesses. It allows companies to stay open while reorganizing and restructuring their debt.

There are pros and cons to whichever type of bankruptcy filing you choose. If the pros outweigh the cons, you should have a workable solution for your financial situation.

How Does a Chapter 7 Bankruptcy Work?

Before discussing the advantages and disadvantages of filing a Chapter 7 personal bankruptcy, it's essential to discuss the basics.

People file a Chapter 7 bankruptcy to get rid of debts they can't pay. Once there's no objection to your petition, the bankruptcy court will discharge your debts. This differs from a Chapter 13 bankruptcy case, where the court approves a repayment plan for a portion of your debts. This repayment plan is called a reorganization.

When you file your bankruptcy forms, you must identify unsecured and secured debts. Secured debts are loans and debts secured by real property or other assets. A mortgage is a good example of a secured debt. Unsecured debts are not tied to any assets. Unsecured debt includes medical bills, personal loans, and credit card debts.

Not all your liabilities will qualify as dischargeable debts. Also, you may wish to reaffirm certain debts. Usually, this happens most often with mortgages and car loans. This is the case with both Chapter 7 and Chapter 13 bankruptcy.

Pros and Cons of Chapter 7 Bankruptcy Protection

The following list of Chapter 7 bankruptcy advantages and disadvantages will help you decide which option is best for you. You don't want to make a rash decision when it comes to a big decision like this.

You should consult an experienced bankruptcy attorney before you make any final decisions. Your lawyer can answer questions that the internet cannot. They know the bankruptcy code and can explain how the means test works in a Chapter 7 bankruptcy case. They'll also represent you at the meeting of creditors to ensure that your interests are protected.

Disadvantages of Chapter 7

Advantages of Chapter 7

A Chapter 7 bankruptcy will stay on your credit reports for up to 10 years.

It only takes about three to six months to complete your Chapter 7 bankruptcy, during which there is an automatic stay in effect. Once complete, you'll enjoy the relief you desperately need from most of your debt.

You'll lose property not exempt from sale by the bankruptcy trustee. You may lose some of your luxury possessions.

State exemptions may allow you to retain most of your property.

You also get to keep any income you earn and property you acquire after you file for Chapter 7.

You won't be able to use all the credit cards where you owe money.

You may be able to obtain new lines of credit within one to three years of filing bankruptcy.

Bankruptcy will make it nearly impossible to get a mortgage for a while if you don't already have one.

Some lenders specialize in lending and home buying for people after bankruptcy.

Declaring bankruptcy now might make it harder to do later if something worse comes along. You can't file for another Chapter 7 bankruptcy for six years.

You can only file under Chapter 7 once every six years, but you can file Chapter 13 if needed.

Bankruptcy won't relieve you of your obligations to pay alimony or child support

Bankruptcy will alleviate many of your other financial obligations, but you'll need a family court order to suspend alimony and child support obligations.

You can't discharge student loans in bankruptcy as a general rule.

You may be able to discharge your student loans upon a showing of undue hardship, which is generally viewed as a high standard to meet.

You can't file for Chapter 7 bankruptcy if you had a Chapter 7 or Chapter 13 within the last six years.

If you obtain a Chapter 13 discharge in good faith, the six-year bar doesn't apply.

To keep your collateral, you may still be obligated to pay some of your debts, such as a mortgage lien.

The amount and number of debts a bankruptcy court can relieve you from paying are potentially unlimited.

If you file for Chapter 7 relief but have a certain amount of disposable income, the bankruptcy court could convert your Chapter 7 case to a Chapter 13. This would change your plan to be free from most debts within four to six months to a plan requiring you to repay your debts over the course of three to five years.

Chapter 7 doesn't require you to have debts of any particular amount to file for relief. But your case converting to Chapter 13 can still improve your financial situation by obtaining more favorable terms to pay off your debts. With Chapter 13, you get to keep all your property as well.

What Happens After a Chapter 7 Bankruptcy?

Before you file for bankruptcy, you must secure a certificate from a credit counseling agency and file proof of the same with your petition. In addition, before the court grants your discharge, you must secure an additional certificate from a legitimate debt management agency. These certificates show the court that you completed your education programs on managing your finances in the future.

Once your bankruptcy discharge is complete, you'll no longer owe money to your creditors. Of course, if there are debts you reaffirmed, you will continue to pay them long after the bankruptcy is over.

Depending on your financial situation, the court may order a liquidation of certain assets. For example, the judge may require you to sell nonexempt property to pay your creditors. The trustee will collect the money from the sales and distribute it to your creditors in order of priority. For example, the trustee will pay secured creditors before unsecured creditors. If there isn't enough money to pay your debts in a particular category in full, the creditors will receive a pro-rata share of your assets.

After the bankruptcy case, you'll no longer owe the debts you included in your petition. You will only owe debts you reaffirmed during your case. You will also be able to apply for new loans, credit cards, and vehicle loans. You may receive these loans after six months. If you apply sooner than that, the lenders will likely deny your application due to the recent bankruptcy.

You must pay any credit card debt, medical bills, or other debts you incur post-bankruptcy.

Have an Attorney Guide You Through the Chapter 7 Bankruptcy Process

Deciding whether to file Chapter 7 is challenging. Contacting an experienced bankruptcy lawyer before you file any papers is in your best interest. They'll let you know if this is your best option. They will also walk you through the process so you know what to expect.

Visit Findlaw.com's attorney directory to find a bankruptcy attorney near you.

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