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

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In a Nutshell

Chapter 7 bankruptcy is one of the most powerful debt relief options available in the United States. It gives you a fresh start by erasing your debts. This article explores the pros and cons of filing Chapter 7 bankruptcy.

Written by Attorney Andrea Wimmer.  
Updated August 4, 2020


Chapter 7 bankruptcy is one of the most powerful debt relief options available in the United States. It can help filers get out of poverty and provides them with a clean slate. It gives you a fresh start by erasing your debts. But, filing bankruptcy is a personal decision and it’s important to fully consider whether it’s the right option for you. This article explores the pros and cons of filing Chapter 7 bankruptcy.

What about the pros and cons of filing Chapter 13 bankruptcy?

Chapter 7 and Chapter 13 bankruptcy are both powerful debt relief options for folks in need of a fresh start. But the pros and cons of filing Chapter 13 bankruptcy are quite different than for Chapter 7. If you have a high disposable income or non-exempt assets you want to protect, Chapter 13 may be right for you. Check out this article to find out more about the pros and cons of filing Chapter 13 bankruptcy. 

What are the Upsides of Filing Chapter 7 bankruptcy?

Immediate relief in the form of a much needed breathing spell

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

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’ve never filed bankruptcy before, pass the means test, and are honest in your dealings with the bankruptcy court and the bankruptcy trustee, you can get your bankruptcy discharge in as little as 3 months. As long as you make sure you meet all requirements before and after filing your bankruptcy case, it’s basically automatic. 

You’ll probably get to keep all of your stuff

Folks in more than 95% of all Chapter 7 bankruptcies filed in the United States keep all of their belongings.[1] That’s because the law protects certain property - called exempt property - from your 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 want, you can even keep your car after filing bankruptcy

You’ll still have to pay for it, but that’s only fair, right? On the other hand, if you don’t want to keep it, Chapter 7 bankruptcy allows you to walk away from the car and your car loan! Here’s everything you need to know about keeping your car after filing Chapter 7 bankruptcy

After filing bankruptcy, missed monthly payments and other negative marks on your credit report no longer hurt your credit score

The clean slate you get when your bankruptcy discharge is granted is your chance to rebuild your credit and increase your credit score. Most people have a higher credit score 1 year after filing Chapter 7 than on the day they began the bankruptcy process. 

Improved Access to Credit and Banking

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, it will give you access to the safety net that comes with having a credit card in case of an emergency. 

What are the Cons of Filing Chapter 7 Bankruptcy?

Filing a Chapter 7 bankruptcy is not right for everyone. And even if it feels like the best debt relief option for you, it may not be once you consider some of the cons of Chapter 7. 

You can’t file Chapter 7 if you make too much money

If you’re making less than the median income, you’re probably wondering how that’s even possible. Don’t fret; this is not about you. This is about folks who have money they can put into savings after paying their main living expenses. 

That’s called having disposable income and it’s calculated by 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. 

If you have good credit, it will likely take a temporary hit

Those that are able to maintain their monthly payments and keep their credit score high before filing their bankruptcy petition will see their score drop initially. But, a bankruptcy filing often does more good than harm to the filer’s credit score. Plus, once their bankruptcy discharge is granted, they can begin increasing that pesky credit score immediately. 

It does not erase all unsecured debts

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

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 the requirement to give up certain expensive items. Nonexempt property - the type of property the bankruptcy trustee can sell to pay creditors in a Chapter 7 bankruptcy case - is pretty rare. 

If you own expensive property you don’t want to lose, it’s best to speak to a bankruptcy lawyer. Then you’ll know whether that’s really a possibility and, if so, whether filing Chapter 13 is a better debt relief option for you. 

Your Chapter 7 bankruptcy filing does not protect others

A bankruptcy filing under Chapter 7 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.

Filing Bankruptcy Can Be Expensive

The bankruptcy court charges a $335 filing fee for Chapter 7 cases. If you earn more than 150% of the federal poverty guideline, you have to pay this filing fee. It’s possible to file your case and pay the fee in up to 4 payments if you can’t pay it all at once. But, if you don’t pay it in full, your case will be thrown out by the court

If you hire a law firm or bankruptcy lawyer to help you, 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 that has to be paid before your case is filed. And that’s on top of the filing fee and the cost of taking the required credit counseling courses.

Depending on your financial situation and the goals you want to accomplish with your bankruptcy filing, hiring the right bankruptcy lawyer for your case can be a great investment. But, a lot of Chapter 7 cases are simple and can be successfully completed without a lawyer. 

File Chapter 7 bankruptcy for Free with Upsolve

There are many things to consider when deciding whether to file 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, Upsolve’s free web app gives you the tools you need to successfully navigate the Chapter 7 bankruptcy process without a lawyer. If your financial situation is a bit more complex, and Upsolve is not a good fit for you, it can help you find a bankruptcy attorney in your area.  

Ready for the next step? If so, take this short quiz to find out if Upsolve is a good fit for you. Not quite sure how it works? Check out this 10-Step Guide on how to file bankruptcy for free. And feel free to browse our Learning Center to find answers to all of your questions! 


Sources:
  1. American Bankruptcy Institute. (2002). Bankruptcy by the Numbers - Chapter 7 Asset Cases. ABI Journal. Retrieved August 4, 2020, from https://www.abi.org/abi-journal/chapter-7-asset-cases

About the author
Attorney Andrea Wimmer

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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