If you’re unable to pay your debts as they come due, or if you think you’ll soon be unable to do so due to a loss in household income, you may be wondering whether you should file bankruptcy to deal with it all. Chapter 7 bankruptcy is a powerful tool for American consumers 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 of the 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.
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.
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 into them with the Better Business Bureau and read online reviews. Typically only unsecured debts can be included in a debt management plan.
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 ultimately you end up needing to file bankruptcy anyway. 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.↑ Back to top
How can credit counseling help?
Credit counseling is a great place to start exploring your debt relief options. It can help you learn more about your options both in the context of bankruptcy and outside of bankruptcy. It's free and takes less than an hour to complete. Together with a trained financial counselor, you'll review your financial situation. Your financial counselor can explain debt relief options like debt negotiation, debt consolidation loans, debt management plans, and bankruptcy. Your financial counselor will also be able to make a recommendation on what solution is best for you.
A credit counseling course from an approved counseling agency must be completed before bankruptcy filing. If you think that bankruptcy may be the only option for you, then it's a good idea to take the course from an approved provider so it can eventually serve as the required pre-bankruptcy credit counseling course.↑ Back to top
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What can I gain by filing Chapter 7 bankruptcy?
Chapter 7 bankruptcy offers many benefits to filers. 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 the United States bankruptcy court. Creditors can never again attempt 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
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 eliminated when your Chapter 7 discharge is granted, some are not. Debts that can't be erased through bankruptcy are known as non-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, which are backed by specific property, are not erased in bankruptcy if you keep the property securing the debt. The most common secured debts are mortgage loans backed by real property and car loans secured by the vehicle. If you plan to keep your house or car through Chapter 7 bankruptcy, you must be current on your payments and continue making payments throughout your bankruptcy case.
Filing bankruptcy stops collection actions
As soon as you file for bankruptcy, the automatic stay takes effect. This means your creditors must stop all collection actions against you. Collection phone calls must stop. Any wage garnishment that's happening or about to happen will be stopped. Filing bankruptcy will also prevent utility shut off and help recover a driver's license that was suspended because of unpaid debts.
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. You will need to become current on your payments to be able to stop a foreclosure, repossession, or eviction permanently. Also, if your landlord already has a court-ordered eviction before you file for bankruptcy, then the automatic stay won't stop the eviction. However, you can avoid eviction even if your landlord already has a judgment if you certify to the court that state law allows you to cure (catch up on) the missed rent payments that led to the eviction. You'll have to catch up on all payments within 30 days of filing for bankruptcy and deposit rent that becomes due during those 30 days with the bankruptcy court clerk.
Filing bankruptcy can improve access to credit
It's a common misconception that filing bankruptcy will ruin a person's credit forever. Bankruptcy can actually be a path to a better credit score. Often within a year, a filer's credit score is better than before they filed.
Filing for bankruptcy harms your credit score in the short-term but carrying high balances and missing payments can damage your credit score for much longer. After bankruptcy, most debts are erased and missed payments are a thing of the past. Lenders look more favorably on borrowers whose credit reports show low or no debt and no recent history of missed payments. The increase in disposable income from having no debts to pay helps, too. For the majority of filers, their credit score and access to credit will improve after bankruptcy.↑ Back to top
What can I lose by filing Chapter 7 bankruptcy?
The United States Bankruptcy Code allows people who file bankruptcy to keep assets valued up to a certain amount. Personal belongings, property, and other assets that are protected through bankruptcy are considered exempt property. Assets that can't be protected through bankruptcy are called nonexempt property. The exemption laws vary by state.
Nonexempt property can be lost if you file for Chapter 7 bankruptcy. The bankruptcy trusteeassigned to your case can take nonexempt assets and sell them, giving proceeds to your creditors. However, the majority of Chapter 7 bankruptcy cases are "no asset" cases, which means there are no assets for the bankruptcy trustee to take. Typically, filers are able to keep most or all of their belongings.
The Bankruptcy Code also 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 for 8 years. It's important to consider the timing of your filing. For example, if medical issues are ongoing and large out of pocket expenses are expected soon, filing a Chapter 7 now may put you in a worse position 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.
Another notable drawback to filing Chapter 7 bankruptcy is that cosigners will be stuck with your debts. Your bankruptcy discharge applies only to you. Anyone who cosigned a debt for you will have to pay back that debt. Also, be aware that bankruptcy petitions are public record. Anyone who wants to – and knows how to access them – would be able to look at your bankruptcy forms and see your current monthly income, disposable income after expenses, and other personal financial information.↑ Back to top
Should I file bankruptcy?
Answering this question, you’ll typically find that there are three groups of people:
Those who should file for Chapter 7 bankruptcy right now;
Those who should wait a little bit of time and then file for Chapter 7 bankruptcy; and,
Those who should not file for Chapter 7 bankruptcy.
Who should file Chapter 7 bankruptcy
It's the right time to consider filing for Chapter 7 bankruptcy if you have more than $10,000 of dischargeable debt that you're unable to repay. If it's going to take you many years to get out of debt, if at all, then filing for Chapter 7 right now might be the right debt relief solution for you.
If you don't own expensive nonexempt property that the court could take away, Chapter 7 could give you the debt relief you need and allow you to keep all of your belongings and property through the bankruptcy process.
Further, if your credit score is less than 600 because of maxed-out credit cards, carrying high debt loads, and missed payments, then it isn't a bad idea to explore how filing Chapter 7 bankruptcy can benefit you.
Who should not file Chapter 7 bankruptcy right now
Deciding the best time to file for bankruptcy protection is critical to getting the most out of the fresh financial start that Chapter 7 bankruptcy can offer. Depending on your specific situation, it may be best to wait to file or not file at all. If you're in any of the following situations, then you probably should not file Chapter 7 bankruptcy right now.
If you're less than $10,000 in debt. As we shared above, you can only file Chapter 7 bankruptcy every 8 years.
If you're not eligible for Chapter 7 bankruptcy discharge because you received a discharge in a Chapter 7 case filed less than 8 years ago or a Chapter 13 case filed less than 6 years ago.
If Chapter 7 bankruptcy can’t eliminate the majority of your debts. Non-discharge debts include recent tax debts, domestic support obligations, money you owe from illegal behavior, and, generally, student loans. Filing Chapter 7 won't help you if most of your debts are non-dischargeable.
If you're judgment proof. This means that even if your creditors sued you for nonpayment, there's nothing they would be able to collect from you.
If you have expensive property or assets that you're worried about losing. If you're worried, it's not a bad idea to meet with a bankruptcy lawyer for a free consultation. They can explain to you which of your assets are exempt and which are nonexempt.
Another thing to consider is whether or not you pass the means test, which determines whether you qualify for Chapter 7 bankruptcy. The means test is a review of your income and allowable expenses that looks back over the past 6 months. If you don't currently pass the means test because your average household income is greater than the median income in your state, but it has recently gone down, then you may be able to pass the means test and file Chapter 7 in a few months. If you don't pass the means test, you can file a Chapter 13 bankruptcy right now whether or not your income has changed. 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. If you paid back or transferred property to a family member or friend in the last year, then it may be 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.
There are other situations that make it better to wait to file Chapter 7 bankruptcy. If you have other debt relief options worth pursuing, then try those first. Or, if you think you may fall into more debt in the near future, then consider holding off on filing. If you're suing someone or planning to sue someone, then it’s best to wait on filing bankruptcy until you know the final outcome of that case. Also, if you owe your landlord money and you don't plan to move, try to catch up on missed rent payments before filing.↑ Back to top
I failed the means test. Should I file Chapter 13 bankruptcy?
Chapter 13 bankruptcy operates differently than Chapter 7 bankruptcy. The main difference is that Chapter 13 requires a 3 to 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, for example, you fail the means test because your income is too high and 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 mortgage arrears in the plan payment and the ability to keep nonexempt assets by paying the value of that asset in the plan payment.↑ Back to top
Whether you should file for Chapter 7 bankruptcy depends on your financial situation and if other debt relief options would work for you. 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 can feel like a big decision. You want to understand what you stand to gain and lose by filing either type of bankruptcy. Talking to a bankruptcy attorney can help you clarify the right option.
Upsolve helps people who can’t afford an attorney hire an attorney for their Chapter 7 bankruptcy and provides a number of free resources and 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 web app is the solution for you.↑ Back to top