What are the Pros and Cons of Filing Chapter 7 Bankruptcy?

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Written by Kristin Turner.  Reviewed by Andrea Wimmer, Esq.
Updated March 9, 2020


Chapter 7 bankruptcy has its pros and cons. Read this article to figure out whether Chapter 7 bankruptcy is a good fit for you.

There are upsides and downsides of Chapter 7 bankruptcy. Usually, Chapter 7 bankruptcy is a powerful tool that helps get people out of poverty. Filing bankruptcy is an important social safety net. It can help people get a fresh start by erasing their debts. Like most things, there are upsides and downsides to filing for bankruptcy.

Bankruptcy can have major benefits including: offering immediate relief from debt collectors, erasing most of your debts, improving your credit score, and preventing wage garnishment.

Depending on your circumstances, there are also other aspects to consider including: the impact on your credit, the fact that certain debts that can’t be erased, and the reality that expensive property can be taken.

Bankruptcy is a personal decision and it’s important to fully consider whether it’s the right option for you. This article discusses some of the upsides and downsides of filing for Chapter 7 bankruptcy.

What are the Upsides of Filing for Bankruptcy?

You’ll Get Immediate Relief

Bankruptcy prevents bill collectors from contacting you the moment you file your paperwork with the bankruptcy court. This is called the automatic stay. The automatic stay means you have legal protection from creditors.

If debt collectors still attempt to reach out to you, the court could penalize them. When they call, just give them your bankruptcy case number. It is important to note that the automatic stay varies in length if you’ve filed for bankruptcy before. 

Your Debts Will Be Erased

Bankruptcy can erase most common types of debt including debts from credit cards, medical bills, personal loans, lawsuits, utilities providers, and cell phones. The filer’s obligation to pay these debts is eliminated when the bankruptcy discharge is entered by the bankruptcy court. Someone filing consumer bankruptcy, typically under one of the two types of bankruptcy most common for individuals, receives their bankruptcy discharge after meeting all of their requirements. 

Keep in mind that there are certain debts that can’t be erased with either type of bankruptcy. This includes student loans, certain tax obligations, government judgments or penalties, some housing related fees, child support and alimony payments.

Your Credit Score Will Improve If it’s Poor

Most people who need to file for Chapter 7 have a credit score below 600. Erasing their debts through the bankruptcy process gives them a clean slate, which can actually help improve their credit score.  Once you receive a discharge, there are multiple ways to start rebuilding your credit including: using a secure credit card, being an authorized user on some else’s card, and sticking to a budget.

Any or all of these options can help you increase your credit score after bankruptcy and create a better financial future.

Your Wages Won’t Be Garnished

Wage garnishment occurs when creditors have a court order that allows for a portion of your paycheck to get sent to your creditors. However, once you file for bankruptcy, the automatic stay stops this from happening. In doing so, it can actually improve your income because you actually get to keep the money you earn at work. 

You Will Get a Fresh Start

Filing for bankruptcy can help you get back on your feet and stay there. Once you get a fresh start you can start planning for your financial future. One of the first steps will be to rebuild your credit.  After you receive your discharge, it will be very important for you to request your credit report to verify that everything is listed properly or to correct anything that is listed inaccurately.

Knowing this information will help you start off on the right foot and create a plan that will help you achieve your financial goals.

Prevent a Water, Gas, or Electricity Shut Off

Because the automatic stay applies to utilities as well, bankruptcy can help you keep your water, gas, and electricity on.

Recover Your Suspended Driver’s License

Sometimes people can have their driver’s license suspended for things like not paying parking tickets or driving without insurance. Filing for Chapter 7 can help you recover your driver’s license.

Stop a mortgage foreclosure, tax sale of your home, or eviction from an apartment

As soon as you file for bankruptcy, the “automatic stay,” blocks all collection attempts being made by your bank lenders and landlords. This includes foreclosures.

Prevent a car from repossession

If you are all caught up on the payments, the “automatic stay” generally prevents creditors from repossessing your car when you file for bankruptcy. However, in special cases, the car can be repossessed if the lender obtains a court order.

If your car has already been repossessed but not auctioned, filing a Chapter 13 bankruptcy might help you get it back. That’s because the repayment plan to pay off your loan, often at a lower interest rate than what you had before filing. 

Improved Access to Credit and Banking

Bankruptcy can be a great way to re-enter into the banking system. Many people start rebuilding their credit right after by accessing secure credit cards, co-signers, or becoming an authorized signer. Bankruptcy can also help you become more attractive to lenders because you no longer have a lot of other debt or creditors that they owe and you can’t file a personal bankruptcy again anytime soon.

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What are the Downsides of Filing for Bankruptcy?

Your Credit Will Go Down If It’s Good

If your credit score is 700 or higher, bankruptcy will most definitely make your credit score go down. However, most people who are considering filing for Chapter 7 already have poor credit and generally see an improvement after they file.

You Can Only File Every 8 Years

If you’ve filed for Chapter 7 before, you have to wait 8 years before you’re eligible for another discharge. So, if you get into even deeper financial trouble after you file you will have to wait a long time for relief. Because of this, it’s important to be sure that you’re not expecting more debt to arise soon after you file. If you’ve filed for Chapter 13 before and now want to file for Chapter 7, it’s important to know that you have to wait 4 years between the two cases.

It Will Appear On Your Credit Report

The fact that you filed for bankruptcy will remain on your credit report for up to 10 years, so anyone who accesses your credit report can see it. The fact that you filed and the debts that get erased will likely still be listed on the report. After you file, it will be important to look at your credit report to make sure that your old debts and the bankruptcy filing are listed accurately.

It Won’t Erase Your Student Loans

Student loans cannot typically be erased with bankruptcy. If this is some or most of your debt, you’ll likely still be on the hook to pay it. In very rare instances, some people who file have been able to show that having to pay their student loan debt would cause “undue hardship” and received partial discharges.

Proving that your student loans are too much of a burden is a very difficult task that often requires a separate lawsuit and an attorney. Because it is unlikely to succeed, most people who file for bankruptcy do not attempt to include their student loans in their case.

It Only Erases Some Tax Debts

You can only erase tax debts that are over 3 years old. You also must be able to show that you did not deliberately avoid paying your taxes.

You Could Lose Expensive Property

Many people who file for Chapter 7 bankruptcy don’t own a property that would be vulnerable under Chapter 7. These are called “no-asset cases.” However, if you do own expensive property, it is important to consider whether that property falls under one of the property exemptions or if you would be willing to let that property go.

Everyone You Owe Money To Will be Notified

When you file for bankruptcy, the court will send a letter to all the people that you owe money to, including friends and family members. If you are hesitant about telling people that they are filing for bankruptcy, keep in mind that this is the first step toward a fresh start and that notifying the people that you owe will help protect you from having to pay these debts back.

Recent Debt Payments Can Be Recovered

If you have repaid a family member for a debt in the past year, the trustee can sue your family member to recover the funds and, instead, distribute them equally to everyone you owe.

Fraudulent Transfers

Fraudulent transfers often occur in one of two forms:

1) when you sell property right before filing for bankruptcy in order to keep the property (like a car or house) out of the possession of the creditor; or 

2) when you sell a piece of property for less than it is actually worth. 

Filing for bankruptcy requires you to have a meeting with a trustee called the Meeting of Creditors, or 341 meeting. It’s during this meeting that the bankruptcy trustee will ask you questions about any transfers they think are suspicious. If a filer does transfer property to someone to hide it from their bankruptcy trustee, the trustee can cancel that transfer and take the property back, then sell it for the benefit of your unsecured creditors. look for any suspicious transfers and cancel any transfers that he/she deem to be fraudulent. 

Your Co-signers will be liable for any debts erased

Sometimes you can have debts that you jointly share with another person. Oftentimes this is a spouse or some other co-signer. This is important because even though you are filing for bankruptcy, your codebtor will still be responsible for the debt. It is important to notify anybody who you share a debt with that you’re filing before you do. They will also receive a notice after you file.

Bankruptcy Can Be Expensive

Bankruptcy can cost anywhere from just under $400 to over $3000 between the filing fees and the attorneys fees. The filing fee is $335 and the mandatory credit counseling can cost up to $50. In many instances, if you feel that you don’t have the money to pay that, you can ask the court to waive the $335 filing fee or let you start a payment plan. Hiring an attorney can be one of the biggest expenses when you’re trying to file for bankruptcy. Many people cannot afford the approximately $1,300 that it typically costs to get help with the paperwork.

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There are many things to consider when deciding whether to file for bankruptcy. Your decision will greatly depend on your personal situation and what your goals are for your financial future.

If you have minimal assets and simply need a fresh start, Chapter 7 bankruptcy can help erase your debt and ultimately improve your credit.

If you think your situation is a bit more complex, Chapter 7 can often still be helpful to improve your financial situation but it’s important to get guidance on whether Chapter 7 or Chapter 13 bankruptcy is the right option for you. Although there are many important things to consider, Chapter 7 bankruptcy is a powerful tool for getting relief.

Filing on your own? Take this short quiz to find out if Upsolve’s free web app is a good fit for your case. If not, or if you decide you’d rather speak to a bankruptcy attorney about your case first, we can match you with an attorney in your area.

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About the authors

Andrea Wimmer, Esq.

Andrea practiced exclusively as debtors’ counsel in consumer chapter 7 and 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team full time in August 2019. While in private practice, Andrea handled all ban... read more

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