Pros and Cons of Chapter 7 Bankruptcy

While filing Chapter 7 or Chapter 13 bankruptcy is a big step, it can also improve your quality of life. Not only can a bankruptcy filing eliminate some of your debt, but it also stops phone calls from creditors and collection agencies. Either bankruptcy option can also provide you with much-needed debt relief and a roadmap for getting your finances in order.

There are consequences to consider as well. Filing a Chapter 7 bankruptcy petition will impact your credit score and force you to pay higher interest rates on any new loans or credit cards you acquire.

This article discusses the pros and cons of filing a Chapter 7 bankruptcy case and what to consider before making a final decision. If you still have questions about whether to file Chapter 7 bankruptcy, consider contacting a bankruptcy law attorney near you.

Is Chapter 7 Bankruptcy Right for You?

Chapter 7 bankruptcy can put an end to late notices and collection actions. It may also address threats of legal action, such as foreclosure, repossession, and lawsuits. Filing a Chapter 7 bankruptcy is a serious undertaking and should be a last resort. Before filing anything with the court, taking the time to determine if a Chapter 7 bankruptcy is the best solution for you and your financial situation is a very good idea.

Who Benefits the Most From Chapter 7?

Chapter 7 bankruptcy is not for everyone. If your only major debt is your mortgage and you’re afraid of going into foreclosure, a Chapter 7 case probably isn’t your best option. The same is true if you have mostly secured debt, such as a car loan or home equity line of credit.

Chapter 7 benefits people who have mostly unsecured debt and few assets. It’s often a better fit for people with a lower income, as a bankruptcy court that determines you make enough money to pay your debts in full is unlikely to approve your Chapter 7 petition. They will either dismiss your case altogether or suggest that you convert it to a Chapter 13 bankruptcy petition.

Chapter 7 is a better option for people with mostly unsecured debt. In Chapter 13, the bankruptcy court expects you to repay your debts, not discharge them. In Chapter 7, the bankruptcy judge will discharge most or all of your debts, especially unsecured debt. Since the whole point of filing bankruptcy is to get a fresh start, it makes more sense to seek a discharge of your debt rather than a reorganization.

Who Should Consider Chapter 13 Instead?

If you own a lot of assets or earn more than your state’s median household income, you’ll likely end up with a Chapter 13 instead of a Chapter 7. The purpose of Chapter 13 bankruptcy is to restructure your outstanding debt while allowing you to keep your assets. If you have personal property and real estate that you don’t want to lose, Chapter 13 is the better option. As long as you don’t have a ton of equity in your home, there’s a good chance the trustee will let you keep it and include your mortgage arrears in your repayment plan.

Chapter 13 is a common choice over Chapter 7 for filers in higher income brackets. To qualify for Chapter 7, you must demonstrate that you earn less than your state’s median household income. If you make too much, the trustee will either dismiss your case or recommend you file Chapter 13.

Factors To Consider When Deciding Which Type of Bankruptcy to File

Deciding to file bankruptcy is never easy. Part of moving forward is choosing the type of bankruptcy you’re going to file. Knowing the pros and cons of each type of bankruptcy can help, but there are other considerations to consider. Some of these factors include:

• Means test eligibility: Does your household income fall below the state’s median? If it does, you will probably qualify for Chapter 7.
• Type of debts you have: Do you have mostly unsecured or secured debt? Chapter 7 is ideal for people with mostly unsecured debt.
• Assets you want to protect: Do you have equity in any real property? If so, you may want to opt for a Chapter 13 instead.
• Previous bankruptcy filings: There are mandatory waiting periods between bankruptcy filings. For example, there is a six-year waiting period to file Chapter 7 after filing a Chapter 13.
• Urgency: Are you facing imminent legal action such as foreclosure, repossession, wage garnishment, levies on your bank account? If so, you may want to consider filing Chapter 7 as quickly as possible.
• Making monthly payments: If you file Chapter 13, you will have to enter a payment plan with your creditors. This isn’t the case with a Chapter 7.

Deciding which type of bankruptcy to file can be overwhelming. There’s no shame in consulting an experienced Chapter 7 bankruptcy attorney before making any final decisions. They can help you weigh the pros and cons of each type and make an educated decision about whether Chapter 7 is the best solution for you.

Advantages of Chapter 7 Bankruptcy

There are many advantages to filing a Chapter 7 bankruptcy. Whether or not they’ll work for you depends on your financial situation. Let’s take a closer look at some of the possible benefits.

Fast Debt Relief

In general, you’ll achieve much faster debt relief with a Chapter 7 than with Chapter 13. It only takes about three to six months to complete a Chapter 7 bankruptcy, whereas it takes anywhere from three to five years to complete a Chapter 13 bankruptcy plan.

As soon as the court receives your Chapter 7 bankruptcy petition, the automatic stay goes into effect. Once this happens, your creditors can no longer contact you about your debt or pursue collection action.

You Don’t Have To Prove a Minimum Monthly Income

To file Chapter 13, you must show that you have enough disposable income at the end of each month to afford your Chapter 13 monthly payments. This isn’t the case for a Chapter 7. In fact, if you make too much money, you won’t pass the means test, and the court will dismiss or convert your bankruptcy case.

Keep Income and Future Property

Chapter 7 allows you to keep any income you earn and property you acquire after you file bankruptcy. Your fresh start applies to your future assets as well as to eliminating old debts.

A Chapter 13 filing enters you into a three-to-five-year repayment plan. During this time, you must make monthly payments to the trustee, who will then distribute the money to your creditors. Under Chapter 13, your bankruptcy is not technically over until you complete your plan.

You Can Protect Most of Your Property

Depending on where you live, state bankruptcy exemptions may allow you to keep most of your property. Many who file Chapter 7 don’t lose any property because exemptions protect everyday assets such as household goods, clothing, and retirement accounts.

There are even exemptions that help protect your motor vehicle and home equity. These protections are not absolute, but they can make the difference between keeping your home or seeing it sold to pay off creditors.

Obtain New Credit Sooner Than You Think

It’s logical to assume that you won’t be able to get new credit for years after filing Chapter 7. That’s not always the case. There’s a good chance you can begin opening new accounts again within one to three years of your discharge. A Chapter 7 bankruptcy will damage your credit initially, but the fresh start often allows you to rebuild your credit faster than you would if you were still struggling with unpaid debts. It won’t be easy and may involve low limits and high interest rates, but it should improve over time.

Specialized Lenders Available

In general, it’s harder to get credit after filing for bankruptcy. Most lenders are wary of giving money to people who just completed a bankruptcy. However, some lenders specialize in providing credit to people after bankruptcy. While it takes time to rebuild your credit, you won’t be permanently shut out of the mortgage or auto loan market.

Flexibility for Future Filings

Many years ago, the rules about filing multiple bankruptcies were rather loose. The bankruptcy laws have changed in this regard. There are mandatory waiting periods before you can refile for bankruptcy, but this doesn’t mean you are entirely precluded from doing so again.

Under the U.S. Bankruptcy Code, you can only file under Chapter 7 once every eight years. However, the law does allow you to file a Chapter 13 if needed. Hopefully, this will never be a concern for you.

Potential Student Loan Relief

You may be able to discharge your student loans upon a showing of undue hardship, but it’s rare. Discharging student loans is viewed as a high standard to meet. While difficult, it’s not impossible in cases of severe permanent disability or other extreme circumstances. Still, don’t plan on being successful if you try.

No Debt Limits

There is no limit to how much secured and unsecured debt you can include in a Chapter 7 bankruptcy filing. This isn’t the case with Chapter 13. Under a reorganization bankruptcy, you cannot have more than $1,580,125 in secured debt and $526,700 in unsecured debt.

Disadvantages of Chapter 7 Bankruptcy

There are many benefits of filing a Chapter 7 bankruptcy. As with most legal processes, there are disadvantages as well. Be sure to weigh the pros and the cons of this type of bankruptcy before you file your petition. Here are some negative aspects to consider.

Long-Term Credit Impact

A Chapter 7 bankruptcy will stay on your credit report for up to ten years. This is longer than Chapter 13, which remains for seven years. Future lenders, landlords, and even potential employers will see the bankruptcy on your record and may hold it against you.

Potential Loss of Property

Depending on how much equity you have in your property, you may not be able to save it. Certain property is non-exempt from sale by the bankruptcy trustee, such as luxury possessions. If you have a lot of equity in your home, the trustee may sell it to pay your creditors.

Credit Card Closures

Once you file your Chapter 7 bankruptcy petition, you will not be able to use your credit cards. The credit card companies will close any accounts you include in your bankruptcy. You can apply for new cards after your bankruptcy, but it may take a while. Banks are reluctant to approve credit cards, loans, and lines of credit for people who have recently filed bankruptcy.

It’s often harder to get new credit cards with a Chapter 7 on your credit report than with a Chapter 13. Lenders would rather provide credit to people who paid their debts back through Chapter 13 when compared to debtors who discharged their debts.

Difficulty Getting a Mortgage

Unless you already have an open home loan, Chapter 7 bankruptcy will make it nearly impossible to get a mortgage until you begin rebuilding your credit. Most conventional lenders require that you wait two to four years post-discharge before applying for a mortgage.

Waiting Period Between Filings

Declaring bankruptcy now might make it harder to file later if your financial situation worsens. You can’t file another Chapter 7 bankruptcy for at least eight years from your previous filing date.

Support Obligations Not Discharged

Chapter 7 bankruptcy will not relieve you of your domestic support obligations such as alimony or child support. These debts survive bankruptcy and must continue to be paid. It takes a family court order to suspend an alimony or child support obligation.

Student Loans Not Dischargeable

As a general rule, you can’t discharge student loans in bankruptcy. Student loan debt requires a separate adversary proceeding and proof of undue hardship, which courts interpret very strictly. There is also a very high chance that the student loan company will object to the discharge of your loans.

You Must Pay Your Secured Debts To Keep Property

To keep your collateral, you may still have to pay some of your debts, such as a mortgage lien. This process is called reaffirmation, and you will remain personally liable for these debts even after bankruptcy.

How Does a Chapter 7 Bankruptcy Work?

Before deciding whether the pros outweigh the cons, it’s essential to understand the basics of how Chapter 7 bankruptcy works. People file a Chapter 7 bankruptcy to get rid of debts they can’t pay. If 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, such as a mortgage. Unsecured debts are not tied to any assets and include medical bills, personal loans, and credit card debts.

Not all your liabilities will qualify as dischargeable debts. You might want to reaffirm certain debts, like mortgages or car loans. Chapter 7 doesn’t require you to have debts of any particular amount to file for relief.

It’s a good move to speak with an experienced bankruptcy attorney before you make any final decisions. 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.

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. If there are debts you reaffirmed, you will continue to pay them 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. Secured creditors are paid 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. You’re responsible for any credit card debt, medical bills, or other debts you incur post-bankruptcy.

After the bankruptcy case, you’ll no longer owe any non-reaffirmed debts you included in your petition. You’ll be able to apply for new loans and credit cards after six months. If you apply sooner than that, the lenders will likely deny your application due to the recent bankruptcy.

When You Need a Bankruptcy Attorney

Bankruptcy laws do not require you to hire an attorney to handle your case, but they can be tricky. Unless you’ve been through this legal process before, you may have difficulty navigating your bankruptcy proceedings.

While it is a good idea to meet with a local bankruptcy lawyer before filing your case, there are certain situations where it is crucial that you consult an attorney. Let’s look at a few.

Navigating the Means Test

To qualify for Chapter 7 bankruptcy, you must pass the means test. This test requires that your household income lie below your state’s median household income. An attorney can help with complex income calculations, advise you on what counts as income and what doesn’t, and provide you with the median income comparisons by state.

If you’re close to the income limits, a missed deduction might make the difference between approval and dismissal. Having an attorney review your petition can be crucial.

Protecting Exempt Property

There’s always the risk that your bankruptcy trustee may order the sale of your property to pay creditors. Various bankruptcy exemptions in your Chapter 7 case can help you keep some of your things. A skilled bankruptcy attorney can help you choose between state and federal exemptions, ensure you maximize the bankruptcy exemptions for your situation, and help hire an expert to appraise your property.

A seasoned bankruptcy attorney will explain whether your state offers wildcard exemptions and, if so, how to take advantage of them. An up-front fee can save much more during the bankruptcy.

Dealing with Creditor Objections

Before the judge orders your bankruptcy discharge, you must attend the “Meeting of Creditors.” This allows your creditors to object to the inclusion of what they’re owed in your bankruptcy. They may oppose a bankruptcy discharge for several reasons:

• Fraud allegations: While it’s rare, there is a chance that one of your creditors may argue that you committed fraud in relation to your account with them
• Preferential payments: If the trustee finds that you made a preferential payment to one of your creditors, your attorney can help demonstrate that this isn’t the case
• Recent large purchases: If the trustee sees that you made large purchases in the weeks and months leading up to your bankruptcy filing, they may dismiss your case
• Adversary proceedings: Trying to include something like a student loan in your discharges can lead to separate adversary proceedings attended by your bankruptcy lawyer

Any of these issues can derail your bankruptcy.

Strategic Reaffirmation Decisions

When you file Chapter 7 bankruptcy, you have the option of reaffirming some of your debts. This involves keeping certain debts out of your bankruptcy so you can continue to make payments on the loan. Most people reaffirm debts such as a car loan or mortgage.

You may think it’s a good idea to reaffirm a specific debt, but it’s a good idea to run the idea by your lawyer. They may have information that will influence your decision or be able to negotiate a better interest rate than what you have on your current loan.

It’s normal to want to keep your motor vehicle or house in a bankruptcy filing, but a look at the long-term implications of reaffirming a debt may change your mind. An attorney can lay out some hard truths you need to hear and decide on.

Complex Asset Situations

Most people who have a number of high-value assets file Chapter 13, not Chapter 7. If you have a complex asset situation, it’s best to consult an attorney before filing your petition. Complicated arrangements can include the following:

• Owning a business: If you own a business, it will certainly complicate your bankruptcy filing. Having a bankruptcy attorney helping with your case can make things less complicated.
• Having valuable collections or intellectual property: Certain types of property are never easily disposed of in bankruptcy. If you own a valuable stamp collection or a copyright, knowing how to deal with it in bankruptcy isn’t simple.
• Expecting inheritance or lawsuit settlement: If you’re waiting for a lawsuit to settle or are expecting a family inheritance, you should definitely talk to an experienced bankruptcy lawyer. They know all the special rules and laws for handling these assets in bankruptcy.
• Co-owning property with others: Things can get very tricky when you own property with another person. The same is true if you have cosigners on certain loans or credit cards. This is the sort of thing bankruptcy lawyers are trained to deal with.

If you’re not an expert in bankruptcy law, making a mistake could hound you for the rest of your life.

Handling Issues To Avoid Dismissal

There are numerous mistakes that can lead to a dismissal, such as not filing the right papers. This means you may end up paying filing fees multiple times and having your protection under the automatic stay delayed. There are numerous potential pitfalls an attorney can help you navigate:

• Representing you at the 341 meeting of creditors: This is where creditors can object to your bankruptcy discharge. Challenging creditors is better handled by someone with experience.
• Responding to trustee requests: Throughout your bankruptcy proceedings, the trustee may ask for additional information or documents. It’s better that your attorney responds to these requests to ensure that the trustee doesn’t force you to turn over documents unrelated to your case.
• Handling unexpected complications: There will always be some sort of disruption or issue in a bankruptcy case. Skilled bankruptcy lawyers are used to dealing with unexpected complications and are much better equipped to handle them.

If you’re considering filing bankruptcy but aren’t sure which chapter is best for you, contact a local bankruptcy attorney. Having a legal expert at your side increases the chances for a successful outcome.

Have an Attorney Guide You Through the Chapter 7 Bankruptcy Process

Deciding whether to file Chapter 7 is challenging. The pros and cons we’ve shared will help you make an informed decision, but everybody’s situation is different. There may be things about your bankruptcy case that require legal expertise.

It’s a good idea to contact an experienced bankruptcy lawyer before filing any papers. They’ll help you determine if Chapter 7 is the best option for you, given your financial situation. They will also walk you through the bankruptcy process, so you know what to expect.