The Pitfalls of Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy is a life-altering decision that everyone should carefully consider. Here are some reasons you might want to consider other financial options before going through the Chapter 7 bankruptcy process.
1. It May Be Unnecessary
Part of the appeal of a Chapter 7 stems from the "automatic stay," a court-ordered mechanism that provides the debtor immediate relief from creditors. What some people do not realize is they might already be protected from harassment. In many cases, creditors must get a court judgment before they can collect from you. Even if your creditors are willing to go through the hassle of obtaining one, the court might deem your debts "judgement proof," which will make it a lot harder for them to take anything away from you. Whether you are judgement proof depends on the type of property you own and from where you receive your income, however, it's worth looking into before you file a Chapter 7.
2. It Can't Erase Every Type Of Debt
While Chapter 7 is known for providing a fresh start, it is important to realize that some debt categories cannot be discharged, namely income tax less than 3 years old, property tax, student loans, and child support. In fact, a creditor may object to the court discharging a debt if you incurred it illegally or in a manner that calls your character into question. For example, if a creditor objects to a debt you incurred by writing a bad check, the court might not discharge it. If the majority of your debt is ineligible to be discharged, filing a Chapter 7 will be a waste of your time.
3. It Puts Your Assets At Risk
When you file a Chapter 7, you should be aware that you will lose control over most of your pre-filing assets. With few exceptions, your property will be turned over to a court-appointed trustee who will determine which of your assets can be sold to pay back creditors. The relief of an automatic stay may bar your creditors from harassing you, but you will still be required to surrender a large portion of your property to be liquidated. While a Chapter 7 does protect some of your assets from being seized to pay off debt, it is important to consider what you might lose, which includes second cars and houses, cash, accounts, and investments, and even valuable items or collections. In any event, keep in mind that much of what you own will no longer be considered yours, which means you will not be allowed to sell or give away any non-exempt property. Research the non-exempt property requirements in you state, or you might be required to forfeit an asset you would be better off keeping.
4. It Damages Your Credit
One of the biggest disadvantages of declaring Chapter 7 bankruptcy lies in the effect it will have on your personal credit. In addition to significantly lowering your score, a Chapter 7 will remain on your credit report for up to ten years. If you are considering filing for bankruptcy these may seem the least of your concerns, yet the long-term impact of the Chapter 7 process is worth considering as it can either force you to accept undesirable terms or even limit your potential to obtain future credit.
While the Chapter 7 form of bankruptcy is relatively common, it's not always the best solution for financial problems. Because declaring bankruptcy can be a very painful, emotional process, it is best to do as much research as possible before making a decision. In some cases it might benefit you to acquire professional help.
1. It May Be Unnecessary
Part of the appeal of a Chapter 7 stems from the "automatic stay," a court-ordered mechanism that provides the debtor immediate relief from creditors. What some people do not realize is they might already be protected from harassment. In many cases, creditors must get a court judgment before they can collect from you. Even if your creditors are willing to go through the hassle of obtaining one, the court might deem your debts "judgement proof," which will make it a lot harder for them to take anything away from you. Whether you are judgement proof depends on the type of property you own and from where you receive your income, however, it's worth looking into before you file a Chapter 7.
2. It Can't Erase Every Type Of Debt
While Chapter 7 is known for providing a fresh start, it is important to realize that some debt categories cannot be discharged, namely income tax less than 3 years old, property tax, student loans, and child support. In fact, a creditor may object to the court discharging a debt if you incurred it illegally or in a manner that calls your character into question. For example, if a creditor objects to a debt you incurred by writing a bad check, the court might not discharge it. If the majority of your debt is ineligible to be discharged, filing a Chapter 7 will be a waste of your time.
3. It Puts Your Assets At Risk
When you file a Chapter 7, you should be aware that you will lose control over most of your pre-filing assets. With few exceptions, your property will be turned over to a court-appointed trustee who will determine which of your assets can be sold to pay back creditors. The relief of an automatic stay may bar your creditors from harassing you, but you will still be required to surrender a large portion of your property to be liquidated. While a Chapter 7 does protect some of your assets from being seized to pay off debt, it is important to consider what you might lose, which includes second cars and houses, cash, accounts, and investments, and even valuable items or collections. In any event, keep in mind that much of what you own will no longer be considered yours, which means you will not be allowed to sell or give away any non-exempt property. Research the non-exempt property requirements in you state, or you might be required to forfeit an asset you would be better off keeping.
4. It Damages Your Credit
One of the biggest disadvantages of declaring Chapter 7 bankruptcy lies in the effect it will have on your personal credit. In addition to significantly lowering your score, a Chapter 7 will remain on your credit report for up to ten years. If you are considering filing for bankruptcy these may seem the least of your concerns, yet the long-term impact of the Chapter 7 process is worth considering as it can either force you to accept undesirable terms or even limit your potential to obtain future credit.
While the Chapter 7 form of bankruptcy is relatively common, it's not always the best solution for financial problems. Because declaring bankruptcy can be a very painful, emotional process, it is best to do as much research as possible before making a decision. In some cases it might benefit you to acquire professional help.
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