A chapter 7 bankruptcy allows the debtor to discharge his/her debts and get a fresh start. While the process can often be humiliating, it is usually for good reasons that should not embarrass the debtors. People file for bankruptcy because they lose a job, they have high medical bills, their home is devalued because of the economy, lack of proper educational training, family issues and for other reasons. All of these reasons, with bad luck, can happen to most anyone.
Sometimes just telling creditors that you are contemplating a chapter 7 bankruptcy, especially if you retain a bankruptcy lawyer, can help persuade stubborn creditors to make more reasonable settlement offers. When settlements can’t be reached, here are some of the pros and cons for filing a Chapter 7.
Pros of Filing a Chapter 7 Bankruptcy
Quick Process: Filing a chapter 7 requires that you take an approved credit counselling course, file a petition, and attend a creditor’s meeting. If everything goes smoothly, meaning that creditors don’t file objections, the whole process takes about six (6) months. At the end of six months, the debtor will normally be discharged from the debts that he/she filed on the bankruptcy petition. There’s no lost time trying to make long-term payments. Most creditors do not file objections.
Less expensive: The process is less expensive than filing a chapter 13 or extensive debt counseling. The main costs are administrative costs and the costs for your bankruptcy attorney.
The attorney is getting paid to review your financial affairs, make sure the petition has all the necessary information, addressing all issues raised by the creditors and trustees, attending the creditor’s meeting with you and making sure the discharge goes through.
The attorney will also explain your options after the bankruptcy such as steps you can take to get your credit back on track.
Debts are discharged: This means you won’t owe the debtors any money. You can focus on getting more income and use the money you do earn/get to pay your necessary bills.
Creditors and collections agencies can’t come after you for these debts because you won’t owe on them anymore. Discharged debts are your chance at a fresh start.
Can reaffirm debts: If you have a car or some asset you really want to save, you may be able to enter into a reaffirmation agreement.
This agreement means that you will keep your car (or other asset) but you will continue to pay the monthly payments and you will also pay the arrears.
Reaffirmation agreements are typically just used for obligations where the creditor has a security interest in the item and you really need the item (such as vehicle) to be able to function or work.
Less hearings: A Chapter 13 bankruptcy takes up to 3 to 5 years. It can also require hearings other than a creditor’s meeting because creditors, especially those with a secured interest in property, are more likely to take an active role in monitoring or checking your plan to pay off your debts.
Additionally, Chapter 13 requires that you work with a trustee for 3 to 5 years. A chapter 7 Bankruptcy is usually just one hearing – a creditor’s meeting. The meeting is often very short in time.
No wage garnishment: Because your debts are being discharged, there’s typically not any right for creditors to garnish your wages because you don’t owe the money.
Cons of Filing a Chapter 7 Bankruptcy
Filing bankruptcy does damage your credit and does mean you may lose some of your assets. Before filing a Chapter 7 bankruptcy, debtors will want to explore debt settlement and debt counselling options to see if there’s any way they can avoid filing a formal bankruptcy.
Debtors will want to consider a Chapter 13 if they have a home or car they want to save and Chapter 7 isn’t an option.
These are some of the main reasons debtors will want to avoid filing a Chapter 7 bankruptcy:
Personal embarrassment: Bankruptcy can be a humiliating process. Most people who file have good reasons to but still feel there’s a social stigma about filing. They worry that family members, friends, neighbors and co-workers will discover that they filed and this can make many people quite uncomfortable. My overall advice in this department would be not to worry at all about it as it’s rarely if ever found out.
Can’t save your home: The main concern most debtors have is where they will live. If they own a home and their exemptions aren’t enough to save it, then the home will have to be sold and the debtor will have to find a new place to live
Can’t save your car and other secured assets: Just like with a home, anyone who has a security interest in your car, tools or other assets will want to try to get their money back.
The way they do this is by repossessing your collateral and selling it. If you’re unable to enter into a reaffirmation agreement and your car or asset is worth more than the exemptions you have, then you will lose the car/asset.
In the end, you’ll have to accept both the pros and the cons of chapter 7, but the end result of a fresh start outweighs the cons substantially as you’ll be in a position to really get your life and finances back in order.