Chapter 7 bankruptcy is one of the most common types of bankruptcy and typically, the one most individuals decide to take when they declare bankruptcy. As with all things, there are pros and cons to chapter 7, and knowing what they are can help you make the best-informed decision for your financial situation before you go into bankruptcy proceedings. Everyone will have different needs when it comes to bankruptcy and being prepared when you talk to a bankruptcy attorney can help resolve the issue faster and more efficiently.
Chapter 7 Overview
Most individuals who are considering filing for chapter 7 find themselves in an overwhelming amount of debt, with no hope of getting out of it. Mortgages, car loans, student loans, credit cards, and other types of unsecured debt on top of your regular expenses can make it difficult to maintain any standard of living. Before the process begins, you will be required to attend credit counseling to evaluate all options and see if bankruptcy is the best route for you. In most cases, they will refer the case to proceed to bankruptcy, but this is a bankruptcy court-mandated process and will sometimes find another option. Chapter 7 will essentially eliminate all the debts you have, with a few exceptions such as student loans, but this will depend on your circumstances. Debts and assets will be collected, and assets will be sold to pay down debt as much as possible, with the rest of the debt discharged. This will mean by the end of the process you will have essentially no debt left, giving a fresh start.
Pros of Chapter 7
The largest benefit of this form of bankruptcy is the elimination of debt. Other forms use a restructuring process and repayment plans such as chapter 13 bankruptcy, but with chapter 7 debt will be eliminated. As soon as you file for bankruptcy, creditors are required to cease all contact with you and stop harassment for debt collection. This can be a huge relief to people if you are constantly receiving phone calls and messages attempting to collect. Although assets will be sold to pay off some of the debt, there are exemptions that vary by state that can allow you to keep certain items, which can also help make bankruptcy seem like a better option. But it cannot be stressed enough that the elimination of debt is the most important thing, and the primary reason chapter 7 is so popular among bankruptcy filings.
Cons of Chapter 7
Most people fear the impact of credit scores more than any other aspect of chapter 7 when they are considering whether to declare bankruptcy. Chapter 7 is unlike other forms of bankruptcy as it stays on credit reports for 10 years instead of the typical 7 years, which can be a cause for hesitation. That being said, taking active steps can help improve your credit score and bring it back to normal. It is possible to get secured debt from financial institutions after bankruptcy, like secured credit cards or secured lines of credit. Making regular payments on these will help bolster your score quicker than you might think.
The other major drawback is the loss of assets to pay off some of the debt initially. All assets and debt are collected by a court-appointed trustee then sold off and eliminated, which can be frightening. However, there are exemptions that can be ascertained, and, in some cases, people will be able to keep important pieces like a home or car.
Is Chapter 7 Right for You?
If you are in overwhelming debt, some sort of bankruptcy is probably a good course of action. Chapter 7 is the most common path taken and may be the best choice for your financial situation. It is important to note that in these extreme cases, the benefits of having discharged debt will more likely than not be far more beneficial than protecting a credit score. People in these positions would see a drastic drop in their credit score if they continue to skip payments if they have not already. Having an experienced bankruptcy attorney can help make sure that important assets are protected through every exemption possible, and after bankruptcy filings are complete you will have the fresh start you need.