Chapter 7 Personal Bankruptcy: Pros and Cons

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Although bankruptcy is something most people would prefer to never think about, it affords a number of benefits to debtors in financial distress. Chapter 7 bankruptcy, also known as a liquidation bankruptcy, is one particular option that individuals can use to sell non-exempt assets and pay off debt. If you’re struggling with serious debt, bankruptcy has to be a consideration. Before making a decision, you should understand the advantages and disadvantages of filing for Chapter 7. 

What Happens In A Chapter 7 Bankruptcy?

In a Chapter 7, a bankruptcy trustee is assigned to sell off (liquidate) non-exempt (unprotected) assets. The money is then used to pay as much of your debt as possible. Debtors with unsecured debt – which means it’s not backed up by collateral – often find Chapter 7 bankruptcy to be the easiest type. 

These are a few of the debts that Chapter 7 can take care of:

What Are The Advantages Of Chapter 7 Bankruptcy?

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One of the main reasons people file for bankruptcy, in general, is so they can clear their debts and have a fresh start. The following are some other advantages to a Chapter 7 filing:

The automatic stay. When you file for bankruptcy, the court enters an automatic stay. This order immediately halts all collection efforts against you, including lawsuits, phone calls, demand letters, and wage garnishments. Foreclosures, repossessions, and evictions also must stop under the automatic stay. This gives the debtor some peace of mind and breathing room to handle his or her debts and finances.

Keeping most of your property. Although many assets have to be liquidated in a Chapter 7 bankruptcy, not all property needs to be sold. The debtor gets to keep most property thanks to exemptions. The following assets can often be protected (exempt):

  • Household appliances
  • Furniture
  • Clothing
  • Retirement accounts
  • Homes up to a certain value
  • Vehicles up to a certain value

Permanent discharge of debts. When you discharge debts like those listed above in a Chapter 7 bankruptcy, they are gone forever. Your creditors cannot revive them in a lawsuit or try to collect on them, and you don’t have to make monthly payments on them anymore.

Ending wage garnishment. If you are under wage garnishment for any debts that are discharged, that goes away, too. This means you keep more of your money and safeguard your future earnings. You may have other debts to which you can direct that money.

Speed. Many debtors are attracted to Chapter 7 bankruptcy because of the relative speed in which it is completed. Most bankruptcies are finished in about 3-4 months, although time will vary from one case to another.

What Are The Disadvantages of Chapter 7?

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As with any bankruptcy, there are certain downsides that have to be weighed against the benefits. These are a few of the disadvantages of Chapter 7 bankruptcy:

Liquidation of certain items. You might have to liquidate a number of items you would rather hold on to, including certain luxury assets. Remember, there are certain exemptions to what you must liquidate, and these can protect many items of property. But they are not absolute. Talk to a skilled lawyer to understand more about liquidation exemptions.

Impact on credit score. As you would probably expect, a Chapter 7 bankruptcy can impact your credit rating. While this does stay on your credit for ten years, many people find their credit scores to improve rather quickly after chapter 7, since the chapter 7 has discharged many of the problematic debts that were causing poor credit ratings in the first place. There may be some steps to repair your credit after your bankruptcy is finished, so speak with a knowledgeable attorney.

Not everyone will qualify. Individuals must meet certain income limits before they can qualify for a Chapter 7 bankruptcy. This is known as the means test, and an applicant’s monthly income has to be lower than the median household income in the state. If you earn more than the median, the court will consider your disposable income in deciding whether you are eligible.

Limits to the number of Chapter 7 bankruptcies. If you file a Chapter 7 bankruptcy, you won’t be able to use this option again for eight years. You should speak with an attorney to decide whether to use this option now or save it for later.

Is Chapter 7 Personal Bankruptcy Right For You?

Every debt situation is different, so there may be additional pros and cons to filing for Chapter 7 bankruptcy. The most important thing you can do is not delay taking action. If you’re facing lawsuits, repossessions, and other efforts to collect your money or seize your property, it’s time to start exploring your legal options. Give Toronjo & Prosser Law a call today to schedule your confidential consultation.