Debt is something that can strike at any moment. All can be going well and then a bout of ill health comes along, costing thousands of dollars to treat. Then there’s an unexpected layoff or furlough that lasts longer than it should. A Chapter 7 bankruptcy is often treated with a negative stigma, but it happens to the best of us. Even well respected financial planners and those in the wealthy class have filed for this bankruptcy.
There are certain advantages to this chapter of bankruptcy, but there are certain disadvantages that must be considered as well if you’re thinking about filing for a Chapter 7. Here’s what you need to know.
What Are the Pros of a Chapter 7 Bankruptcy?
The primary benefit is that most unsecured debt can be wiped away from your financial obligations. That often means medical debt, credit card debt, and other forms of credit where collateral wasn’t used to secure money. Your creditors can no longer contact you about your debts while in bankruptcy as well, which means collection calls will stop. It’s like having a fresh breath of air. Here are the other benefits to consider.
1. The changes are permanent.
This is a restructuring debt bankruptcy that we’re talking about with a Chapter 7. It is a permanent elimination of your responsibility to unsecured debt that you have. It is gone forever. Now some people do choose to come back and pay their obligations when they can to have peace of mind, but this isn’t typically required in a settlement.
2. You get to keep most of the things you have.
When you file for a Chapter 7 bankruptcy, a complete look at your income and assets will be required by the court. There are certain things that you are allowed to keep when you file for this bankruptcy so that you can continue earning an income. This typically includes a vehicle, a place to live, and your personal possessions. Exceptions do occur, especially if you have multiple vehicles or a large amount of equity in your home, but this is examined on a case-by-case basis.
3. Automatic stays can even stop pending lawsuits.
If you’ve been served because of a debt that you owe and you file for a Chapter 7 bankruptcy, if the judge orders an automatic stay on your finances, then you are protected from the debt collection process while your case is being heard. This stay will prevent lawsuits that are pending from proceeding. It also stops wage garnishment, lien filings, or the seizure of property. Just beware that if a case gets dismissed, the stay is terminated and these things resume once again.
4. Collectors cannot try to collect on discharged debt.
Once the court discharges the debt from the Chapter 7 filing, a creditor is not allowed to make collection attempts. Creditors that do so are actually exposing themselves to litigation because you can then pursue them for damages because of their actions.
5. It is remarkably affordable to file.
In the United States, the cost for filing a Chapter 7 bankruptcy is $299. There are a number of documents that must be submitted for the case to be heard instead of just dismissed, which often means an attorney must be hired to navigate the court’s requirements. For those in a pinch and willing to do their own research, however, the cost of a Chapter 7 bankruptcy can often be as low as 10% of the cost of other forms of bankruptcy.
6. Many credit scores immediately improve.
The days after a Chapter 7 bankruptcy discharge are actually good ones for most folks. That’s because their credit has cleared up enough that they begin to receive certain offers from new creditors. Although this creates the trap of debt once again that must be avoided, it does allow for certain conveniences should they be required. A vehicle loan, for example, may be more likely to be secured because the lender knows you can’t file for another bankruptcy until the 8 year mark. Interest rates will be high, but at least there will be credit available.
7. Most cases are resolved in as little as 6 months.
Some Chapter 7 bankruptcy cases have been known to be discharged in as little as 120-150 days. During this period of time, you get to breathe a little easier because all of those collection attempts go away. You’ve got more money to deal with other life issues or to establish an emergency fund so that you aren’t necessarily living paycheck to paycheck.
What Are the Cons of a Chapter 7 Bankruptcy?
The primary disadvantage to the Chapter 7 bankruptcy is that you must pass what is known as a “means test” in order to qualify. Your income must meet certain standards that are set by your local jurisdiction. If your income does not pass the means test and it is determined you have enough assets to meet your obligations, you will be required by the court to file for a Chapter 13 bankruptcy instead so that you can work with creditors to reorganize your debt.
Here are some of the other disadvantages to consider.
1. It lasts for up to 10 years as a negative mark.
Your Chapter 7 bankruptcy will be on your credit history for up to 10 years. This negative mark can drop over 100 points from a credit score all by itself for some individuals. Although many see an initial credit boost because their debt to income ratio improves, there is a good possibility that long-term credit acquisition will be difficult for some time.
2. There are filing restrictions.
If you file for a Chapter 7 bankruptcy today, then you will not be allowed to file for another bankruptcy of this type for a minimum of 8 years after the debt has been discharged. Everyone who files for this type of bankruptcy is also required to attend credit counseling in order for it to be accepted by the court.
3. Not every debt is discharged through Chapter 7.
Most secured debts are not going to be discharged from this bankruptcy. If you owe back child support payments, then you’re still going to owe them after your bankruptcy case. Any debt that is created through fraud will also typically still stand. On in rare exceptions and if specific criteria exist will tax debts or student loans be discharged through a Chapter 7.
4. You can pass the means test and still meet income requirements.
What the means test is examining is how much money is left over at the end of the month after paying basic obligations. If you have enough cash to pay your creditors, then you’ll be required to do so without the convenience of the Chapter 7 bankruptcy. In certain instances, this can even apply if you meet the income requirements listed for the bankruptcy. Every state has unique income guidelines which apply, so the help of an experienced bankruptcy attorney can help quite a bit.
5. You fall under the supervision of a trustee.
Every bankruptcy case receives a trustee that is responsible for overseeing the documents filed. They are also charged with determining whether property that is non-exempt should be put up for sale so that income can be transferred over to a person’s creditors. There is a certain responsibility to sell at market value, so if a $30,000 truck will only fetch $5,000, there is a very good chance that the truck will remain in ownership through the “trustee abandonment” process.
6. You’ve got to face your creditors.
The creditor’s meeting is usually the only time someone filing for a Chapter 7 bankruptcy must go to court. It also means that you’ve got to face the creditors who want to see the details of your case. Failing to attend this meeting often results in the dismissal of the case. Failing to provide income tax returns that have been requested can also result in case termination at this time.
7. The means test looks at 5 years of financial data.
If you have more than the median income and enough disposable income, then the outlook to pay back creditors will be examined over a period of 60 months. If you have the ability to pay back some or all of the owed debts during this period of time, then there is a good chance that a bankruptcy will be denied or a Chapter 13 will be required. A lot can happen over the course of 5 years, which means a constant examination of finances is often necessary.
The pros and cons of a Chapter 7 bankruptcy are designed so that the people who need financial help right now are able to receive it. Many people wait far too long to file for bankruptcy and it winds up being a last-ditch desperation effort. If you are struggling to meet your debt obligations, then consider these pros and cons today.