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

What Is Chapter 7 Bankruptcy? 

Filing bankruptcy is one of the most powerful debt relief options available in the United States. It has helped many people get out of poverty and wipe their financial slate clean. It gives you a fresh start by erasing your debts. 

Chapter 7 bankruptcy is the most common type of bankruptcy filing. You may hear it called a “liquidation” bankruptcy because your trustee can liquidate, or sell off, an nonexempt property. This might sound scary but rest assured that most Chapter 7 filers do not lose any property because their property is protected by exemptions.

What Are the Upsides of Filing Chapter 7 Bankruptcy?

There are several upsides to filing Chapter 7 bankruptcy. Here’s a quick overview:

1. It provides relief from debt collectors as soon as you file.

2. You get permanent debt relief in a matter of months.

3. Most Chapter 7 filers are successful in getting their debts discharged.

4. You get to keep your property.

5. You’ll still have access to credit and banking.

It Stops Collection Efforts Immediately

The moment your case is filed with the bankruptcy court, you’re protected from creditors. Filing bankruptcy triggers an automatic stay (a hold) on all collection actions. This means all phone calls, wage garnishments, and collection letters have to stop. It even put at least a temporary stop to repossessions, evictions, and foreclosures. 

You Get Permanent Debt Relief in the Form of a Bankruptcy Discharge

Filing Chapter 7 bankruptcy wipes out most types of debt, including credit card debt, medical bills, and personal loans. Your obligation to pay these types of unsecured debt is eliminated when the bankruptcy court grants you a bankruptcy discharge. 

Getting Your Bankruptcy Discharge Is Virtually Guaranteed

If you pass themeans test, are honest with the bankruptcy court (and the bankruptcy trustee), and if it’s your first time filing for bankruptcy — you can get your bankruptcy discharge in as little as THREE months. As long as you meet all requirements before and after filing your bankruptcy case, your discharge is basically automatic. 

You’ll Probably Get To Keep Most of Your Property, Including Your Car

More than 95% of all Chapter 7 bankruptcy filers in the United Stateskeep all of their belongings.^[1] That’s because the law protects certain property — called exempt property — from your lenders/creditors. Whether that’s your monthly Social Security check, your watch, or your kitchen table, if it’s protected by an exemption, you get to keep it. 

If you choose to keep your car, unsurprisingly, you’ll still have to continue payments. If you choose not to keep your car, Chapter 7 bankruptcy allows you to give up your car and your car loan. 

You'll Still Have Access To Credit and Banking … You May Even Get More Offers

You’ll get more credit card offers right after filing your bankruptcy than you’ll know what to do with. Not only will this help you rebuild your credit and increase your credit score, but it will also give you access to the safety net. 

If you choose to accept any of these credit card offers, a secured credit card can be a good place to start to rebuild your credit. 

What Are the Cons of Filing Chapter 7 Bankruptcy?

Filing a Chapter 7 bankruptcy is not right for everyone. Even if it feels like the best debt relief option for you, it’s important to consider the cons of Chapter 7 bankruptcy. 

You Can’t File Chapter 7 if Your Income Is Too High

In order to be eligible for Chapter 7, you have to be making less than the median income for your state and not have disposable income. People who have money they can put into savings after paying their main living expenses are considered to have disposable income. You can calculate your disposable income using the means test.

Having too much disposable income means you’re not eligible to simply walk away from your debt. But, while you can’t file Chapter 7, you can still get a bankruptcy discharge after completing a Chapter 13 repayment plan. 

Your Credit Will Take a Temporary Hit

People who are able to maintain their monthly payments and keep their credit score high before filing theirbankruptcy petition will see their score drop initially. Your interest rates can also, temporarily, become higher. 

However, filing bankruptcy often helps the filer’s credit score in the long run. Once your bankruptcy discharge is granted, you have the opportunity to increase your credit score immediately. 

Chapter 7 Doesn't Erase All Unsecured Debts

Some unsecured debts, like alimony or child support, can never be discharged in bankruptcy. Other things, like tax debts and some student loans*, can be hard to eliminate by filing bankruptcy. 

*Many people wrongly believe they cannot use bankruptcy to get rid of student loan debt. Under the Bankruptcy Code, if your student loan debt repayment will cause you great undue hardship, then it is dischargeable. 

In late 2022, the Department of Justice provided clearer guidelines for courts about what undue hardship looks like. To learn more about whether you may meet this standard you can read our article: How To File Bankruptcy on Student Loans. Our team even created a filing tool to help with student loan discharge.

You Can Lose Certain Types of Property

One of the trade-offs for getting a bankruptcy discharge in a matter of a few months is that you may have to give up certain expensive items. These items are called: nonexempt property. This is the type of property the bankruptcy trustee can sell to pay creditors in Chapter 7 bankruptcy proceedings. That said, this is incredibly rare in Chapter 7 cases.

If you own expensive property you don’t want to lose, you can schedule a free consultation with a bankruptcy lawyer to see what your best option is. 

Your Chapter 7 Bankruptcy Filing Doesn’t Protect Others (Like Co-signers)

Chapter 7 only eliminates only your obligation to pay the debt. It does not wipe out the debt for anyone else. Chapter 13 is the only type of bankruptcy that can protect a co-signer, but that only works because you end up paying the debt through your repayment plan.

What Is Chapter 13 Bankruptcy?

Chapter 7 and Chapter 13 bankruptcy are both powerful debt relief options for folks in need of a fresh start. If you have a lot of disposable income, nonexempt assets you want to protect, and the ability to stick to a payment plan, Chapter 13 (the “reorganization” bankruptcy) may be right for you. 

The Cost of Filing Bankruptcy 

It can cost a lot to file bankruptcy. You’ll need to consider the court filing fee, the two required credit counseling and debt education courses, and attorney’s fees (if you choose to hire a lawyer).

The Bankruptcy Court charges a $338 filing fee for Chapter 7 cases, which you must pay unless you’re approved for a waiver. You can apply to pay the fee in four installments, but if you don’t pay it in full, the court will throw out your case. 

If you hire a law firm or bankruptcy attorney to help, you’ll have to pay their attorney fees in addition to the court filing fees. That usually comes out to an average of about $1,500 and has to be paid before your case is filed. 

On top of the filing fee and attorney fees, there’s the cost of taking the required credit counseling courses and debt education courses. These courses can cost no more than $50 each.

Need Help Filing Chapter 7 Bankruptcy?

A lot of Chapter 7 cases are simple enough to be successfully completed without a lawyer. This is called filing “pro se.” Additionally, our team of experts has created a free filing tool that can help you prepare your Chapter 7 bankruptcy case totally free of charge! Check your eligibility to see if our free Chapter 7 filing tool is right for you. 

Additional Reading 

• How Often Can You File Bankruptcy?

• Will Bankruptcy Lower My Credit Score? 

• What Happens After Filing Bankruptcy? 

• What is Unsecured Debt? vs What is Secured Debt?