Chapter 7 Bankruptcy Pros and Cons: What You Need to Know
Chapter 7 bankruptcy offers powerful debt relief with immediate protection from creditors and permanent debt discharge in just a few months. While your credit score might drop temporarily and some debts can't be eliminated, most filers keep all their property and can rebuild credit quickly after discharge.
Get Free ConsultationChapter 7 bankruptcy offers immediate relief from debt collectors and permanent debt elimination. But you need to understand both sides before filing.
Secured debts usually survive bankruptcy. You might lose nonexempt property. Your credit score could drop temporarily.
See If You Qualify for Chapter 7 Bankruptcy
Get a free consultation with a bankruptcy attorney to understand your discharge options and protect your property. Find out if Chapter 7 can eliminate your debt in just months.
Check Eligibility NowBankruptcy remains one of the most powerful debt relief options in the United States. It has helped countless people escape poverty and start fresh by erasing credit card debt, medical bills, personal loans, and some student loans.
What Is Chapter 7 Bankruptcy?
Chapter 7 is the most common personal bankruptcy filing. People call it a liquidation bankruptcy because your bankruptcy trustee can sell any property not covered by an exemption.
That sounds scary. But here’s the truth: More than 95% of Chapter 7 filers keep all their belongings. Bankruptcy exemptions protect most property from creditors.
Most Chapter 7 cases finish in 4-6 months. You’ll get a discharge order that wipes out eligible debts permanently.
The Advantages of Filing Chapter 7 Bankruptcy
Filing Chapter 7 comes with several powerful benefits:
- Debt collectors must stop contacting you immediately after filing
- You can eliminate debt in just a few months
- Most filers successfully clear their debts
- You typically keep all your property and vehicles
- You can maintain bank accounts and rebuild credit quickly
Debt Collectors Must Stop Harassing You
The moment you file, an automatic stay protects you from creditors. Collection calls stop. Collection letters stop. Everything stops.
The automatic stay is powerful enough to pause car repossessions, evictions, home foreclosures, debt lawsuits, and wage garnishment orders.
Discharge Your Eligible Debts Fast
A successful Chapter 7 filing gives you a bankruptcy discharge order. Speaking with a bankruptcy attorney for free can help you understand which debts qualify for discharge.
Your discharge wipes out credit card debt, medical bills, and personal loans. Compared to debt management plans that take years, Chapter 7 works in months.
Your Discharge Is Almost Guaranteed
You must meet certain requirements to file Chapter 7 bankruptcy. Once you meet them, your discharge is virtually certain.
Requirements include:
- Passing the means test
- Completing all required bankruptcy forms
- Taking two mandatory classes
- Responding to your bankruptcy trustee as needed
You Keep Your Property and Your Car
Bankruptcy exemptions protect certain property from your creditors. Whether it’s your Social Security check, your watch, or your kitchen table, protected property stays with you.
Most people keep their cars in Chapter 7. If you’re paying a car loan, stay current on payments to keep the vehicle. Can’t afford the payments? You can surrender the car and discharge the loan.
Then you can find a more affordable vehicle.
You’ll Still Have Access to Credit
Many people fear bankruptcy will destroy their credit access forever. The opposite often happens.
You’ll probably receive more credit card offers after bankruptcy than before. Creditors know you can’t file again for many years.
The downside? Some offers come with high interest rates. Read terms carefully. Only take credit you can afford to repay.
Want to rebuild credit safely? Consider a secured credit card or self-reporting your rent payments. Check your credit report weekly for free and dispute any errors you find.
The Disadvantages of Filing Chapter 7 Bankruptcy
Every debt relief option has drawbacks. Chapter 7 is no exception.
Main drawbacks include:
- Not everyone qualifies for Chapter 7
- Your credit score might drop initially
- Some debts can’t be discharged
- You might lose non-exempt property
- Co-signers won’t receive protection
Income Limits Restrict Eligibility
You must pass the means test to file Chapter 7. Your income must fall below your state’s median income. You must show you lack disposable income.
Have disposable income? You might qualify for Chapter 13 bankruptcy instead.
Understanding Chapter 13 Bankruptcy
Chapter 13 bankruptcy offers debt relief through a reorganization plan. If you have significant disposable income, non-exempt assets to protect, and can stick to a payment plan, Chapter 13 might work better.
Your Credit Score Might Drop Temporarily
People who maintained good credit before filing usually see their score drop initially. Your interest rates on new credit cards or loans will likely increase.
But bankruptcy often helps credit scores long-term. Once you receive your discharge, you can start rebuilding immediately.
Not All Debts Can Be Eliminated
Some unsecured debts can’t be discharged in bankruptcy. Alimony and child support survive bankruptcy. Recent tax debts and most student loans are difficult to eliminate.
Can You Discharge Student Loans?
Many people wrongly believe bankruptcy can’t touch federal student loans. If you can prove repayment causes undue hardship, you might qualify for student loan discharge.
In late 2022, the Department of Justice issued clearer guidelines about undue hardship standards. Read more about filing bankruptcy on student loans to see if you qualify.
You Could Lose Non-Exempt Property
Getting a discharge in a few months means you might surrender expensive items. Most Chapter 7 filers don’t own items at risk. Property loss is incredibly rare.
Still, understand how exemptions work. Know whether you own non-exempt property. If you do, the bankruptcy trustee can sell it to repay creditors.
Co-Signers Aren’t Protected
Chapter 7 eliminates your obligation to pay debt. It doesn’t wipe out debt for others, including loan co-signers.
Chapter 13 is the only bankruptcy type that protects co-signers. That works because you pay the debt through your repayment plan.
Chapter 7 Bankruptcy Costs
Bankruptcy costs can create hurdles for filers. The bankruptcy court charges a $338 filing fee for Chapter 7 cases.
Can’t afford the fee? Apply for a fee waiver. You can also pay in four installments. But if you miss a payment, the court dismisses your case.
Beyond the filing fee, you’ll pay for required credit counseling and debt education courses. These courses cost no more than $50 each.
Attorney fees vary widely by location and case complexity. Speak with a bankruptcy attorney for free to understand your total costs and explore your options.