Should I File for Chapter 7 Bankruptcy?

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Written by Attorney Andrea Wimmer.  
Updated July 7, 2020

Summary

If you can’t pay your debts, or think you’ll soon be unable to do so due to a loss in income, you may be wondering whether you should file bankruptcy. Chapter 7 bankruptcy is a powerful debt relief tool but it’s not right for everyone. Let’s take a look at some things you should consider when deciding your next steps. 

If you can’t pay your debts, or think you’ll soon be unable to do so due to a loss in income, you may be wondering whether you should file bankruptcy. Chapter 7 bankruptcy is a powerful tool for Americans who have fallen on hard times and need a fresh start. But, it’s not right for everyone. Let’s take a look at some things you should consider when deciding your next steps. 

What are my debt relief options?

A number of debt relief options are available to give people the fresh start they need. The one that's right for you will depend on your specific financial situation and types of debts you have. Let's go over each option to explore.

Debt Settlement: You can negotiate with your creditors. If you've fallen behind on payments or are about to, you can contact your creditor to discuss the issue. You may be able to work out an affordable payment plan or negotiate a debt settlement for less than the full amount owed. This is especially true with credit card debt. Typically, a settlement needs to be paid in a lump sum. 

Repayment Plan: Entering into a debt management plan with an agency is another option. It's important to look into the reputation of any debt management agency. Check them out through the Better Business Bureau and read online reviews. Typically only unsecured debts can be included in a debt management plan. 

Debt Consolidation: Taking out a debt consolidation loan to pay off your debts is another debt relief option. You would then have only one monthly payment to make to the new creditor. These loans often offer lower interest rates than what you're already paying.

Other options include selling valuable property to pay back creditors, doing nothing, or filing Chapter 7 bankruptcy or Chapter 13 bankruptcy. 

It's important to be careful about selling off valuable assets to pay off creditors if it is not enough to pay off (or settle) all of your debts. You may end up having to file for bankruptcy anyway and may be able to protect your property using an exemption. 

Bankruptcy isn't the best solution for everyone and it's not a bad idea to consider all of your debt relief options before deciding what's right for you. 

How can credit counseling help?

Credit counseling is a great place to start. It can help you learn more about your debt relief options. Since it’s a requirement for anyone filing for bankruptcy, taking a credit counseling course from an approved counseling agency allows you to check that step of your to-do list early on in the process. 

It's free and takes less than an hour to complete. Together with a trained credit counselor, you'll review your financial situation. They will then explain the different debt relief options and make a recommendation on what solution is best for you.

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What can I gain by filing Chapter 7 bankruptcy? 

Chapter 7, the most common form of personal bankruptcy, offers many benefits. The greatest benefit is that it erases most debts. At the end of a successful Chapter 7, you'll receive a bankruptcy discharge order from a United States bankruptcy court. Creditors can never again try to collect on a debt that's been discharged. After bankruptcy, you'll have the fresh start that you need.

Bankruptcy erases most unsecured debts, which are debts not connected to any specific piece of property. Unsecured debts erased by Chapter 7 bankruptcy include:

  • Credit card debts

  • Medical bills

  • Personal loans

  • Older tax debts

  • Old utility bills

  • Old cell phone bills

  • Deficiency on a car loan after a repossession

  • Other dischargeable debts

While most debts are wiped out when your Chapter 7 discharge is granted, some are not. Debts that can't be erased through bankruptcy are known asnon-dischargeable debts. The most common non-dischargeable debts are recent tax debts, child support or alimony payments, and generally student loans. You will have to pay these types of debts back after bankruptcy. 

Secured debts are not erased in bankruptcy if you keep the property securing the debt. The most common secured debts are mortgage loans secured by real property and car loans secured by a vehicle. Make sure you are and continue to be current on your payments if you want to keep the property during and after your bankruptcy case. 

Filing bankruptcy stops collection actions 

As soon as you file for bankruptcy, theautomatic stay takes effect. This means your creditors must stop all collection actions against you. Collection phone calls must stop. Wage garnishment must stop. A bankruptcy filing also prevents utility shut offs and can help the filer recover a driver's license that was suspended because of unpaid debts. 

Secured debts and the automatic stay

The automatic stay also stops a foreclosure, repossession, or eviction – at least temporarily. Filing a Chapter 7 bankruptcy can't stop these collection actions forever. Bankruptcy laws require you to catch up your payments to stop a foreclosure, repossession, or eviction permanently. If your landlord already has a court-ordered eviction before you file for bankruptcy, then the automatic stay won't stop the eviction unless you’re able to pay past-due rent quickly. 

Filing bankruptcy can improve access to credit 

No, filing bankruptcy will not ruin your credit forever. That’s a myth. Although your credit score will likely drop a few points when your bankruptcy petition is first filed, the effect on your credit report is short term. Bankruptcy, and the fresh start it grants you, is a path to a better credit score. With some smart financial management, your credit score can be better than when your case was filed within a year of getting your bankruptcy discharge. 

Chapter 7 bankruptcy does not change your income

If you’re not currently paying your debts, keep in mind that filing Chapter 7 bankruptcywon’t change your overall situation. Filing bankruptcy removes your obligation to pay your debts, but you’ll still have to cover all of yourliving expenses going forward. Your income does not change once your case is filed. 

What can I lose by filing Chapter 7 bankruptcy? 

The United States Bankruptcy Code allows you to keep your property as long as it is protected by an exemption. Typical personal belongings, including cars, furniture, and similar items are generally protected. Expensive or luxury items are not protected. These types of nonexempt assets are sold by the bankruptcy trustee, who uses the proceeds to pay creditors. 

More than 90% of all personal bankruptcy cases in the United States don’t have any nonexempt property. This means the filers are able to keep all of the belongings. State law determines the exemptions a person filing bankruptcy may claim. 

Timing issues

It's important to consider the timing of your filing. The Bankruptcy Code limits how often a person can receive a bankruptcy discharge. If you file for Chapter 7 bankruptcy right now and receive a discharge, you lose the ability to file another Chapter 7 bankruptcy for 8 years. 

For example, if you have medical issues, filing a Chapter 7 now may put you in a worse position in the long term. That’s because it won’t protect you from future medical bills. If you end up with thousands of dollars of medical debts but no way of getting protection from the bankruptcy court for a few years. 

Cosigners are not protected

Your Chapter 7 bankruptcy does not protect your cosigners and they will not receive a discharge. Anyone who cosigned a debt for you will have to pay back that debt. 

Should I file bankruptcy? 

Folks looking for a fresh start typically fall into one of three categories: 

  1. Those who should file for Chapter 7 bankruptcy right now;

  2. Those who should wait a little bit of time and then file for Chapter 7 bankruptcy; and,

  3. Those who should not file for Chapter 7 bankruptcy.

Should I file Chapter 7 bankruptcy right now?

Do you have more than $10,000 of dischargeable debt and keeping up with payments is making it impossible to make ends meet every month? Are you worried about being sued or having your wages garnished? Do you pass the Chapter 7 bankruptcy means test? If so, right now may be the right time to file for bankruptcy. 

Who should not file Chapter 7 bankruptcy right now

Deciding the best time to file bankruptcy is critical to getting the most out of your fresh start. Depending on your specific situation, it may be best to wait or not file Chapter 7 bankruptcy at all. If you're in any of the following situations, then you probably should not file Chapter 7 bankruptcy right now:  

  • You have less than $10,000 in debt. 

  • You filed Chapter 7 bankruptcy less than 8 years ago.

  • Most of your debt can’t be discharged.

  • Your only source of income is social security, which creditors can’t touch even without bankruptcy. 

  • You have property you don’t want the bankruptcy trustee to sell. 

Another important factor is whether you’re eligible for Chapter 7 bankruptcy under the means test. The means test is based on the last 6 months of your income. If you don't pass the means test, you can file a Chapter 13 bankruptcy but not a Chapter 7 bankruptcy right now. Below we'll explore if you should file for Chapter 13 bankruptcy protection. 

Who should wait to file 

Certain activities can complicate a Chapter 7 bankruptcy and waiting a little bit of time can help. If you're still using your credit cards on a regular basis or you've made large purchases in the last 6 months, then it's best to wait to file and pay off your most recent charges first. 

If you paid back or transferred property to a family member or friend in the last year, then it’s best to wait to file, if you can. You have to disclose these activities in your bankruptcy paperwork and you'll be asked about them at your meeting of creditors

If you're suing someone or planning to sue someone, then it’s best to hold off on your bankruptcy filing until you know the final outcome of that case, if possible. Also, if you owe your landlord money and you don't plan to move, try to catch up on missed rent payments before filing. The same generally goes for car loans that you want to reaffirm. 

I failed the means test. Should I file Chapter 13 bankruptcy?

Chapter 13 bankruptcyworks differently than a Chapter 7 bankruptcy. The main difference is that Chapter 13 requires you to propose a 3 - 5 year repayment plan. Chapter 13 is a powerful debt relief option, especially those who can't file for Chapter 7 bankruptcy. 

If you're considering filing Chapter 13 because you don't pass the means test, look at the reasons you aren't passing. The look back period is 6 months, so the outcome of the means test can change. If you recently experienced a drop in household income, then you might qualify for Chapter 7 in the near future. 

Consider, too, if you'll get a benefit from a Chapter 13 filing that you wouldn’t otherwise get in a Chapter 7 case. A few benefits of Chapter 13 bankruptcies not available in Chapter 7 cases include the ability to catch up on your mortgage and lower the interest rate on your car loan. If you have nonexempt property you want to keep, Chapter 13, unlike Chapter 7, allows you to do just that. 

Conclusion

Whether you should file for Chapter 7 bankruptcy depends on your financial situation and what other debt relief options are available for someone. It's also important to consider the timing of filing. Taking a credit counseling course is a great starting place to learn more about your debt relief options. 

Filing for bankruptcy is a big decision. It’s important to understand what you stand to gain and lose by filing either type of bankruptcy. A free consultation with a bankruptcy attorney can help you clarify what’s best for you. 

Upsolve’s free web app helps people who can’t afford an attorney prepare for their Chapter 7 bankruptcy. Our free Learn Center provides information about how to navigate the Chapter 7 bankruptcy process. Eligible filers can use Upsolve's free web app to prepare their bankruptcy forms. Read about how Upsolve works to explore if our free web app is the solution for you.

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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