Many people asking themselves, "Should I file for bankruptcy?" also wonder, "Is it bad to file for bankruptcy?" If you're in lots of debt, the answer is usually no.
Written by Attorney Jonathan Petts.
Updated July 30, 2020
Bankruptcy has earned a negative reputation over the years. Some people think that filing for bankruptcy is a bad thing. They may have heard stories about people losing their property or they may believe that they will never own anything nice again if they file bankruptcy. Common bankruptcy myths have helped to spread negative beliefs about filing bankruptcy.
We want to tell you the truth about filing for bankruptcy relief. Filing a Chapter 7 bankruptcy case to get out of debt is not a bad thing. For many people, filing bankruptcy is the best way to resolve debt problems. Bankruptcy gives them a fresh start when they need it the most.
In This Article:
Why do people file Chapter 7?
What are the benefits of filing Chapter 7?
What are the requirements of filing Chapter 7?
Why Do People File Chapter 7?
One of the reasons people think filing bankruptcy is bad is because they think people file bankruptcy because they abused credit. It is true that some people who file bankruptcy may have overused credit to buy or do things they could not afford to do without credit. However, most people who file a bankruptcy case suffered a financial hardship because of unforeseen life events.
Some of the reasons that people need to file Chapter 7 include:
A permanent decrease in income, including retirement or partial disability
Divorce or separation
Death of a spouse or family member
Injured at work
Maybe you cannot afford to pay your bills because of something that happened that was out of your control. Maybe you made some poor financial decisions. It does not matter!
The bankruptcy court does not judge a person for why that person needs to file for debt relief. The court does not base debt relief on why you cannot afford to pay your bills. Chapter 7 is available no matter why you need it, provided that you meet the requirements for filing under Chapter 7.
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What Are The Benefits of Filing Chapter 7?
Most people find that filing for debt relief under Chapter 7 is a good thing. Some of the reasons that filing Chapter 7 is a good thing include:
Chapter 7 gets rid of debts quicker.
When you file bankruptcy under Chapter 7, you can get rid of your unsecured debts in as little as four to six months after filing. Chapter 7 is the quickest bankruptcy case.
An unsecured debt is money owed to a person or a company that is not secured by property. In other words, if you do not pay an unsecured creditor, that creditor cannot take your property without a court order. The creditor has to file a lawsuit and get a court order before it can try to take any of your property or money to pay the debt.
Examples of unsecured debts that you can discharge in a Chapter 7 case include credit cards, medical bills, personal loans, old utility bills, some old income tax debts, payday loans, and old rent or lease payments.
Some debts are not dischargeable in bankruptcy. Not dischargeable means that you cannot get rid of these debts when you file a bankruptcy case. Alimony and child support are two examples of debts that you cannot get rid of in bankruptcy. Student loans and most income tax debts are also not dischargeable in bankruptcy.
This is not a repayment plan like Chapter 13.
In a Chapter 13 case, you must pay back some of the money you owe to unsecured creditors. The amount you pay back in your Chapter 13 plan is based on several things. However, all Chapter 13 cases include some money for the unsecured creditors. It’s important to note that you must pay all payments required by your Chapter 13 plan (usually five years) to receive a bankruptcy discharge in Chapter 13.
You are not required to pay back any of the debts that are discharged in your Chapter 7 case. When you receive the bankruptcy discharge, any debts that are discharged are gone forever. A creditor is prohibited by law from trying to collect a discharged debt. The creditor cannot demand you pay the money or file a lawsuit to try to collect the money.
You get to keep your future income and property.
Because there is not a repayment plan and you do not have to pay back debts that are discharged, you get to keep your future income. This benefit is very important because it allows you to pay your monthly living expenses and begin saving money for the future.
You also keep your property in a Chapter 7 case. In a few cases, a person might have to give up a valuable piece of property like a house or an expensive car. However, most people who file under Chapter 7 are allowed to keep all their property. A case in which the person doesn’t have an expensive piece of property to sell in order to pay their creditors is called a “no-asset” case.
Bankruptcy exemptions protect certain pieces of property. When you prepare your bankruptcy forms, you choose which exemptions to claim. If the exemptions cover all your property, you get to keep the property.
Also, if the equity in the property is low, usually under $500, the Chapter 7 trustee typically does not sell the property because there is not enough money after the costs of the sale to pay your unsecured creditors.
Chapter 7 stops creditor harassment and lawsuits.
When you file a Chapter 7 bankruptcy case, creditors must stop trying to collect the debts. The bankruptcy court sends a notice to all the creditors on your bankruptcy forms to tell them you filed Chapter 7. You may get a few phone calls after you file your bankruptcy case, but once you tell the creditor you filed Chapter 7, the calls should stop.
Also, creditors cannot take other actions to collect debts discharged in Chapter 7. For example, a creditor cannot file a lawsuit to collect a debt, so you do not need to worry about wage garnishments or a creditor taking property to pay a judgment (a debt you owe after a lawsuit is filed by a creditor).
You can qualify for loans and credit after Chapter 7.
Some people believe if they file a Chapter 7 bankruptcy case that they will never be able to buy another car or get a credit card. However, people who file Chapter 7 do eventually qualify for loans and credit.
The Chapter 7 bankruptcy case stays on your credit report for 10 years. Filing bankruptcy will lower your credit score, but the decrease is temporary. You can begin to improve your credit score as soon as you complete your Chapter 7 case.
Many people see an increase in their credit score in just a year or two after the Chapter 7 case is complete when they apply the things they learned about manage credit from their second bankruptcy course.
What Are The Requirements for Filing Chapter 7?
Income Requirement - The Means Test
The most important thing to keep in mind about Chapter 7 is that you must meet certain income requirements in order to file. Chapter 7 is designed for people who do not have enough money to pay even a portion of their debts. Chapter 13 is used when someone can afford to pay back even a small portion of their debts over a 3-5 year period of time.
When Congress revised the Bankruptcy Code in 2005, they added a Means Test as a requirement to file Chapter 7. The Means Test is a bankruptcy form that every person completes as part of their bankruptcy filing. Since Chapter 7 is reserved for people who are low-income, it measures their income to decide if they are eligible to file Chapter 7 to erase their debts.
The Means Test uses your income for the past six months to compare your annual income to the average income of other households in your area. If your income is below the average income in your area, you “pass” the Means Test and can file a Chapter 7 case.
If your income is above the average income in your area, you must complete the second portion of the form. The second portion of the form deducts allowable monthly expenses from your income to decide if you have any money each month to pay your creditors. If you have little to no money left over each month, you may qualify for Chapter 7. Therefore, you can earn above the average income and still file for Chapter 7 in some cases.
Other Requirements - Two Credit Counseling Courses
Individual debtors must complete a credit counseling course. The credit counseling course is also known as the pre-bankruptcy course or first bankruptcy course. The course is simple to complete and can be finished online in about two hours. The information you use to complete the course is the same information you use to complete your bankruptcy forms. Therefore, the course can help you get ready to prepare your bankruptcy forms.
To get rid of your debts, you must also complete a second bankruptcy course (debtor education course). The second bankruptcy course is taken after you file the Chapter 7 bankruptcy forms. The debtor education course can be finished online in about two hours. The certificate you receive when you finish the course must be filed with the court or you will not receive a discharge of your debts.
There are not too many other requirements for filing a bankruptcy under Chapter 7. Individuals, married couples, and companies can file for debt relief under Chapter 7. When a company files Chapter 7, the company closes. However, when an individual files a Chapter 7 case, that person gets rid of debts he or she cannot pay for a fresh start.
Need a Fresh Start?
Filing Chapter 7 does not need to be a bad thing. For many people, filing a Chapter 7 bankruptcy case is a good thing. They get rid of their debts, keep their money, and keep their property. Watch videos made by people who have used Upsolve’s no costbankruptcy forms to file Chapter 7. They got rid of their debts and you can too.
If you can afford to hire a bankruptcy attorney, we encourage you to do so. However, we believe everyone should have a chance to get out of debt even if they cannot afford to pay a bankruptcy attorney for help.
Upsolve is a non-profit company that helps people who cannot afford to pay an attorney file Chapter 7 on their own. We provide our services free of charge to people who qualify for our service. Use our free screening tool now to see if filing Chapter 7 might be a good thing for you.