It can be stressful and frustrating when you’re struggling to pay debts that you cannot afford. Dealing with debt can be even more overwhelming when creditors and collectors do not care about your reasons for not repaying debts. They simply want their money and will take whatever steps they can to get it.
Stopping creditor harassment and debt collection lawsuits are two of the common reasons people seek bankruptcy relief. However, filing for bankruptcy isn’t for everyone. If you’re wondering whether a Chapter 7 bankruptcy case is your best option for debt relief, consider the pros and cons before filing.
Why Do People Seek Bankruptcy for Debt Relief?
The most commonly recognized benefit of filing bankruptcy is debt relief. Bankruptcy was designed to give individuals the opportunity to eliminate debts they cannot pay.
The “fresh start” offered through bankruptcy allows debtors to recover after a financial crisis and rebuild their financial well-being without the stress of dealing with creditors.
Without bankruptcy, individuals would not have a means of getting out of debt after various life events cause significant cash flow issues. Some causes of financial hardship include:
- Long-term or permanent reduction in income
- Death of a spouse
- Sudden illness or accidental injury
- Separation or divorce
- Business closure or downturn in business
In some cases, overusing credit cards or poorly managing finances creates a situation in which a person is unable to pay debts. The bankruptcy court does not judge why a person needs debt relief. Bankruptcy laws apply regardless of your reason for filing a Chapter 7 case.
The Pros & Cons of Filing For Chapter 7 Bankruptcy
Most consumers file for bankruptcy relief under Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 13 is a reorganization in which a debtor proposes a repayment plan. Individuals filing Chapter 13 typically do not pay all unsecured debts in full; however, this option is best for those who can afford to pay at least some of their debts.
A Chapter 7 case is a liquidation bankruptcy. Debtors who file under Chapter 7 must meet income requirements to qualify for a bankruptcy discharge under this chapter. However, a debtor’s property may be sold to pay unsecured debt if bankruptcy exemptions do not protect the property’s equity.
The decision to file a Chapter 7 or Chapter 13 case can be complicated. An attorney who is experienced in Texas bankruptcy can help you navigate the eligibility requirements for filing a Chapter 7 bankruptcy case and if this type of filing is your best debt relief option.
Advantages of Bankruptcy Under Chapter 7
There are many advantages to filing bankruptcy, even for debtors who file a Chapter 7 case. These are some of the benefits:
- Chapter 7 gets rid of most, if not all unsecured debts. Typically, these include credit card debt, medical bills, old utility bills, personal loans, payday advances, and some older tax debts.
- Most Chapter 7 cases filed in Texas are no-asset cases. In a no-asset case, the debtor keeps all his or her property. Bankruptcy exemptions protect a certain amount of equity in property from the Chapter 7 trustee and creditors.
- A typical Chapter 7 no-asset case can be completed in four to six months from the filing date.
- Filing a Chapter 7 case stops creditor harassment. The automatic stay prevents creditors from taking any further collection action once you file your Chapter 7 bankruptcy petition.
- Creditors are also prohibited from attempting to collect any debts discharged in your Chapter 7 case.
- You can improve your credit score after filing Chapter 7 because a discharge eliminates debts you cannot pay. While you may see a temporary credit score decrease, you can begin improving your credit rating once your Chapter 7 case is complete.
- You do not report debts that are discharged in Chapter 7 as income on your tax returns. If you negotiate with creditors to settle your debts for less than the amount owed, you may be required to report the portion of the debt written off by the creditor as income on next year’s tax return.
- Most retirement accounts and public benefits are exempt when you file a bankruptcy case.
Disadvantages of Bankruptcy Under Chapter 7
Chapter 7 bankruptcy isn’t the best option for everyone. Therefore, there may be downsides for certain individuals:
- You are required to meet income requirements to receive a discharge under Chapter 7. It is important to remember if your income exceeds the Texas median income level for bankruptcies, you may still qualify for a Chapter 7 bankruptcy discharge if your allowable expenses reduce your income to pass the Bankruptcy Means Test.
- Certain debtors may lose property when they file Chapter 7. The trustee assesses your estate to determine if there is any property with non-exempt equity. If bankruptcy exemptions do not cover the equity in a piece of property, the trustee may sell that property to pay unsecured debts. However, since most Chapter 7 filings are considered no-asset cases, property loss only affects a minority of debtors.
- You are required to take two bankruptcy courses. The credit counseling course is completed before your case is filed and the debtor education course is completed within 60 days from the first date set for your hearing. While they may be tedious, these courses will help you learn ways to improve your finances and credit score after bankruptcy.
- Although a Chapter 7 bankruptcy filing may stop a foreclosure or repossession, it cannot prevent the creditor from seizing the asset if you do not catch up your payments. If you choose to give up a home or vehicle you cannot afford, the creditor cannot obtain a deficiency judgment seeking additional money if the sale of the assets does not pay the loan in full.
- Alimony, child support, most student loans, and a few other debts are not eligible for a discharge. However, these debts are not eligible for a discharge in Chapter 13 either.
While Chapter 7 is not without risk, the benefits of filing for bankruptcy under this chapter typically outweigh any disadvantages.
Discuss the Pros and Cons of Bankruptcy’s with an Attorney Today
Every debtor’s situation is unique. Therefore, we encourage you to call our firm to discuss the pros and cons of every debt relief option, including bankruptcy.