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

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Written by Kristin Turner.  
Updated August 4, 2019

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What are the pros and cons of Chapter 7 bankruptcy?

There are upsides and downsides of Chapter 7 bankruptcy. Usually, Chapter 7 bankruptcy is a powerful tool that helps get people out of poverty.

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.

In This Article:

  • What are the Upsides of Filing for Bankruptcy?

  • What are the Downsides of Filing for Bankruptcy?

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What are the Upsides of Filing for Bankruptcy?

You’ll Get Immediate Relief

Bankruptcy prevents bill collectors from contacting you the moment you file. This is called an “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. The automatic stay will only last for 30 days after your second filing and will not kick in at all if you’re filing for a third time.

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.

Keep in mind that there are certain debts that can’t be erased with Chapter 7. 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.

By erasing their debts and the amount of people they owe, it can actually help your credit score go up after filing. Some people see as much as a 40 point increase within the first six months.

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. There are only a few exceptions such as student loans, taxes, and child support.

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. This will likely include budgeting and using secured credit cards.

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 for bankruptcy might help you get it back.

Once the automatic stay goes into place, you might be able to negotiate with the lender or decide to “redeem” the debt. This means that you accept responsibility for the debt and payment despite the bankruptcy 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.

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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 file 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.

According to NerdWallet, “of people who filed for bankruptcy in 2007 and had student loans, only an estimated 0.1% attempted to have their college debt discharged.”

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

Depending on what state you live in, if you own a valuable piece of property such as a car or a house they will likely be taken in order to help pay your debts.

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 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, a “341 meeting.”

It is during this meeting that the trustee will 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. Often times 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 is $14.95. 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.

Luckily, if you can’t afford an attorney, free services like Upsolve can help you get to a fresh start through Chapter 7 bankruptcy.

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There are many things to consider when deciding whether or not 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 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? Upsolve’s free survey can help you see if Chapter 7 might be a good fit. You can get started with Upsolve by clicking here.

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Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

To learn more, read why we started Upsolve in 2016, our reviews from past users, and our press coverage from places like the New York Times and Wall Street Journal.


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