Filing a Chapter 7 bankruptcy case can get rid of debts and protect your property. However, filing for bankruptcy is not a decision that you should make lightly. Once you file a Chapter 7 petition, you may not be able to get out of bankruptcy if you change your mind. Therefore, it is wise to review the pros and cons of Chapter 7 bankruptcy before you take steps to file Chapter 7.
Pros and Cons of Bankruptcy Chapter 7
- Less Expensive Than Chapter 13 — The fees and costs of filing Chapter 7 are typically much less compared to filing under Chapter 13.
- Quick — A no-asset Chapter 7 case is typically completed within four to six months after filing the Chapter 7 petition.
- Keep Property — Many people who file under Chapter 7 keep all their property, but there is a chance that you could lose property in Chapter 7. See the “cons of Chapter 7” below for more about losing property in Chapter 7.
- Stop Debt Collection Lawsuits — If a creditor sues you, filing Chapter 7 stops the lawsuit. If the debt is eligible for a discharge, the lawsuit cannot resume and you get rid of the debt. For creditors with judgments, the Chapter 7 gets rid of judgments if the debts are dischargeable.
- Prevents or Gets Rid of Deficiencies — A deficiency is the amount of money owed to a creditor after a foreclosure or repossession. In other words, you owe more money even though you lost the property. Filing Chapter 7 gets rid of deficiency judgments. Chapter 7 also prevents deficiencies. If you surrender collateral in Chapter 7, the creditor cannot try to collect more money from you if the sale of the property does not pay the debt in full.
- Losing Property — Chapter 7 is a liquidation bankruptcy. Any property that is not protected by bankruptcy exemptions is at risk of being sold by the Chapter 7 trustee. The Chapter 7 trustee uses the money from the sale of a debtor’s property to pay the debtor’s unsecured creditors.
- Some Debts Are Not Dischargeable — Some debts are not dischargeable in bankruptcy, including most taxes and student loans. Alimony, child support, restitution, some judgments, and most government debt is not dischargeable in bankruptcy. If you file under Chapter 7, you continue to owe these debts when you complete your bankruptcy case.
- Harder to Prevent Foreclosure and Repossession — Because there is not a bankruptcy repayment plan in Chapter 7, you must catch up on mortgage payments and car loan payments quickly to keep your home and car in Chapter 7. Under Chapter 13, you can spread out those payments over three to five years to keep your home and car in bankruptcy.
- Income Requirements — Chapter 7 has specific income requirements to qualify for a bankruptcy discharge under this chapter of bankruptcy. The bankruptcy Means Test compares your income to the average income of households in your state. If your income exceeds the median income for your state, you may not qualify for discharge in Chapter 7. However, the Means Test may not apply if the majority of your debts are business debts. Also, you might still qualify for Chapter 7 if your disposable income (income you can use to repay debts) is below a certain amount.
Should I File A Chapter 7 Bankruptcy Case?
Deciding whether to file Chapter 7 can be a complicated matter. You must analyze your income, expenses, debts, and assets very carefully to weigh the risks of filing Chapter 7. Depending on your situation, there could be additional pros and cons of Chapter 7 bankruptcy to consider.
If you are unsure what to do about your debts, you may want to consult an experienced bankruptcy attorney near you. A bankruptcy lawyer analyzes your financial situation to determine the pros and cons of Chapter 7 bankruptcy for you.
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