The pros and cons of filing for Chapter 7 bankruptcy
Understanding the pros and cons of filing for Chapter 7 bankruptcy may help those struggling with debt determine if it may help their situations.
When struggling with overwhelming debt, people may consider options such as Chapter7 bankruptcy to help them regain control of their finances. Filing for Chapter 7 bankruptcy may provide substantial relief; however, people should not take this step lightly. In addition to the potential benefits, this potential debt relief option also carries possible disadvantages.
Before deciding to file for Chapter 7 bankruptcy, it may help for people to consider the potential pros and cons of this debt relief option.
Pro: Quick resolution
Chapter 7 bankruptcy cases typically come to quick resolutions. Depending on the circumstances, some cases may conclude within three to six months of people’s filings. The efficient resolution of their cases may allow people to put their financial struggles behind them and begin the process of rebuilding and moving forward.
Con: Long-term credit effects
Filing for Chapter 7 bankruptcy has long-term implications for people’s credit. Chapter 7 bankruptcy cases show up on credit reports and may remain a part of people’s history for up to 10 years after the completion of their cases. Having a bankruptcy filing on their credit reports may affect people’s ability to obtain home loans and other such lines of credit.
Pro: Property exemptions
State and federal exemptions allow people to keep some assets when pursuing Chapter 7 bankruptcy relief. Among these may include reasonably necessary clothing, household appliances, reasonably necessary household goods and furnishings, and equity in primary residences. Jewelry, up to a certain value, and motor vehicles, up to a certain value, may also qualify as exempt. Thus, people may not have to turn these assets over to their bankruptcy trustees for liquidation.
Con: Property liquidation
Known as liquidation bankruptcy, people may have to relinquish certain property to obtain relief through Chapter 7 bankruptcy. Exemptions may allow them to retain their primary residences, primary vehicles and certain other assets. However, people who file for Chapter 7 bankruptcy may have to turn over assets such as collections of value, family heirlooms, expensive musical instruments, vacation properties and second vehicles.
Pro: Discharge of debts
As part of people’s Chapter 7 bankruptcy filings, the court may issue a discharge order. Once issued, this order releases people from financial liability for allowable debts. Further, it prohibits creditors from taking further action to attempt to recover these debts. With few exceptions, the court may order the discharge of people’s unsecured debts, including credit card balances, medical bills and personal loans.
Con: Debts exempt from discharge
Some debts do not qualify for Chapter 7 discharge. According to the U.S. Bankruptcy Court for the Central District of California, people may still have financial responsibility for tax debts, student loans, domestic support awards, property settlement obligations, and fines and other criminal restitution obligations after completing their Chapter 7 cases. Additionally, those who complete Chapter 7 bankruptcy filings may still have to pay debts incurred due to theft or fraud, intentional injuries they inflicted, and injuries or deaths caused by drunk driving accidents.
Ultimately, people should take the decision of filing for Chapter 7 bankruptcy seriously. Therefore, those struggling with debt and considering this option may find it helpful to discuss their circumstances and needs with a legal representative.