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

What Is Chapter 7 Bankruptcy? 

Bankruptcy is one of the most powerful debt relief options available in the United States. It’s helped many people get out of poverty and get a financial fresh start by erasing eligible debts, including credit card debt, medical bills, personal loans, and some student loans.

Chapter 7 bankruptcy is the most common type of personal bankruptcy filing. You may hear it called a “liquidation” bankruptcy because your bankruptcy trustee can liquidate, or sell off, any property you own that isn’t covered by an exemption (i.e., non-exempt property). This might sound scary, but rest assured: Most Chapter 7 filers do not lose any property because all their property is protected by exemptions.

What Are the Pros of Filing Chapter 7 Bankruptcy?

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

• It stops debt collectors from bothering you as soon as you file.

• You can get rid of your debt quickly, usually in just a few months.

• Most people who file Chapter 7 are able to clear their debts.

• Most filers keep all their property, including household goods and vehicles.

• You can retain your bank accounts and continue to access (and rebuild) your credit.

Filing Chapter 7 Stops Debt Collectors From Bothering You

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 debt collectors cannot continue to make phone calls or send collection letters. 

The automatic stay is even powerful enough to put at least a temporary stop to a car repossession, eviction, home foreclosure, debt lawsuit, or wage garnishment order.

A Successful Bankruptcy Filing Wipes Out All (Eligible) Debt… Fast

If your Chapter 7 bankruptcy filing is successful (most are), you’ll get a bankruptcy discharge order. This court order wipes out many types of debt, including credit card debt, medical bills, and personal loans. 

Compared to other forms of debt relief like a debt management plan, Chapter 7 bankruptcy is fast. Most people see their debts discharged in a matter of months. Most Chapter 7 bankruptcy cases take 4–6 months to complete.

Getting Your Bankruptcy Discharge Is Virtually Guaranteed

You need to meet a few requirements and jump through some hoops to file Chapter 7 bankruptcy. But as long as you meet all the requirements, your Chapter 7 bankruptcy discharge is almost guaranteed.

As a reminder, the requirements include:

• Passing the means test

• Filling out all the required bankruptcy forms

• Taking the two required classes

• Responding as needed to your bankruptcy trustee.

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

More than 95% of all Chapter 7 bankruptcy filers in the United States keep all of their belongings. 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, you get to keep it if it’s protected by an exemption. 

One of the most common concerns of folks considering Chapter 7 is whether or not they get to keep their car. Luckily, most people do! 

If you’re paying on a car loan, you’ll need to be current on payments and continue making your payments on the loan to keep the vehicle. If you can’t afford to keep paying the car loan, you can give up the car and have the loan wiped out. Then, you can try to find a more affordable car to ensure you can still get yourself and your family around and get to work.

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

Many potential Chapter 7 filers are worried that filing bankruptcy will keep them from getting credit cards and loans in the future. While it might seem counterintuitive, you’ll probably get more credit card offers right after filing your bankruptcy than you’ll know what to do with. That’s because creditors know you can’t file bankruptcy again for many years.

The downside is that some of these offers may not come with great interest rates, so read the terms carefully and only take out credit you’re confident you can afford to repay. As you’ve probably learned, it’s important to have and regularly repay your credit to rebuild your credit and increase your credit score. 

If you aren’t ready to take the plunge with a loan or credit card just yet but want to start rebuilding your credit, consider getting a secured credit card or loan and look into self-reporting your rent or other payments to help boost your credit score. 

You can also dispute any errors you see on your credit report to help increase your score. It’s free to check your credit report weekly, so take advantage!

What Are the Cons of Filing Chapter 7 Bankruptcy?

As we said before, every debt relief option has its pros and cons. Chapter 7 bankruptcy is no exception. Even if you decide Chapter 7 is right for you, it’s good to know what the drawbacks are so you know what you’re getting into.

Here are some of the main drawbacks:

• Not everyone is eligible to file Chapter 7.

• Your credit score might take a hit.

• Some debts can’t be erased in Chapter 7.

• If you have non-exempt property, you might lose it.

• Co-signers won’t be protected.

Not Everyone Is Eligible for Chapter 7 — You Can’t File if Your Income Is Too High

To be eligible for Chapter 7, you have to pass the means test. This means you have to make less than the median income for your state and show you don’t have disposable income. 

If you have disposable income, you may be eligible to file Chapter 13 bankruptcy instead. 

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, non-exempt assets you want to protect, and the ability to stick to a payment plan, Chapter 13 (the “reorganization” bankruptcy) may be right for you. 

Chapter 13 allows you to get on a repayment plan to pay your debts over a 3–5-year timeline. After the plan is up, remaining debts are discharged. Chapter 13 is much more complicated than Chapter 7. To be successful, you’ll probably need to hire a qualified bankruptcy attorney. Most offer free consultations for legal advice to help you decide if bankruptcy is right for you.

If You Have Good Credit, It’ll Probably Take a Temporary Hit

People who’ve been able to maintain their monthly payments and keep their credit score high before filing their bankruptcy petition usually see their credit score drop initially. If you have or apply for credit cards or loans, you’ll probably have higher interest rates as a result.

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’t be discharged in bankruptcy. Other things, like recent tax debts and some student loans, can be hard to eliminate by filing bankruptcy. 

Can Student Loans Be Erased in Chapter 7?

Many people wrongly believe they can’t use bankruptcy to get rid of federal student loan debt. If you can show your federal student loan debt repayment will cause you undue hardship, you may be eligible for a student loan discharge.

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.

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. Most Chapter 7 filers don’t own expensive items that are at risk. It’s incredibly rare for anyone to lose property in a Chapter 7 case.

Still, it’s important to understand how exemptions work and whether you own any non-exempt property. If you do, the bankruptcy trustee can sell it to repay creditors in your Chapter 7 bankruptcy proceeding. 

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 options are. 

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

Chapter 7 only eliminates your obligation to pay the debt. It does not wipe out the debt for anyone else, including anyone who co-signed a loan with you. 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.

How Much Does It Cost To File Bankruptcy?

Bankruptcy costs can also be a hurdle for filers. The bankruptcy court charges a $338 filing fee for Chapter 7 cases. If you can’t afford the fee, you can apply for a fee waiver. You can also apply to pay the fee in four installments. But be aware that if you don’t make all four payments, the court will throw out your case. 

There are other costs associated with filing bankruptcy, too. The biggest cost is hiring a lawyer. That usually comes out to an average of about $1,500 and has to be paid before your case is filed. The good news is that many people use Upsolve’s free filing tool to file their Chapter 7 case without an attorney. 

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.