Benefits and Disadvantages of Filing Chapter 7 Bankruptcy
Benefits and Disadvantages of Filing Chapter 7 Bankruptcy
Filing bankruptcy is a huge decision. And, there are a lot of smaller, yet extremely important choices to be made regarding the process. Should you file bankruptcy? What type of bankruptcy should you file? When should you file bankruptcy?
The majority of petitions for bankruptcy are filed under Chapter 7. Chapter 7 bankruptcy is known as liquidation bankruptcy. During the Chapter 7 process, a court appointed trustee may liquidate (sell) the petitioner’s nonexempted assets in exchange for a court approved discharge order. Many petitioners do not have any nonexempted assets, which means they do not need to sell anything, get to keep all their property, and still receive a discharge order for a lot of their outstanding debt.
This gives people a clean slate and a path to rebuild their financial health. It is the most common type of bankruptcy filed. However, before you file, it is important to weigh the benefits and disadvantages of filing Chapter 7 Bankruptcy.
Benefits of Filing Chapter 7 Bankruptcy
There are many benefits to filing Chapter 7 bankruptcy. Some of the benefits apply to all types of bankruptcy, while others apply only to Chapter 7. Benefits include basic things like stopping harassing phone calls immediately to more complex items like limiting the amount of time your credit is affected by the bankruptcy process. Chapter 7 bankruptcy is the most common and quickest form of bankruptcy filed. Reviewed below are some of the most important benefits of filing Chapter 7 bankruptcy.
Harassing Calls Stop Immediately. This is the most important thing for many people. The harassing calls stop immediately once the bankruptcy petition has been filed. The automatic stay, a temporary injunction, requires creditors to stop calling. Once the automatic stay is granted, it also means creditors must stop any process for repossessions, foreclosures, or garnishments. It is a type of time out until the bankruptcy process has been completed.
A permanent injunction is issued once the judge issues the discharge order at the end of the Chapter 7 bankruptcy process. Once you have paid the required fees, completed your credit counseling class and workbook, and compiled the necessary documents, Attorney Trezza can file your petition in less than 48 hours. This means once you have paid the required fees and completed the necessary items, the harassing calls can stop within 48 hours.
Time on Your Credit Report. Filing Chapter 7 bankruptcy stays on your credit report for seven (7) to ten (10) years. Although this is a disadvantage as well, because Chapter 13 may affect your credit report less depending on your individual circumstances, the benefit for Chapter 7 comes because your recovery time starts immediately from the date you file. Filing for Chapter 7 bankruptcy in Arizona, typically, takes four to six months. This means as early as four months, your debt is completely discharged, and the clock has started running on your recovery.
This is an advantage over Chapter 13 because the clock for Chapter 13 does not start running until after you have completed the payment plan process, which can take three to five years after the petition is filed. Once the case ends, then your recovery time begins. Whereas, for Chapter 7, your recovery time begins almost immediately.
If you decide not to pursue Chapter 7 bankruptcy when you should have, missed payments, lawsuits, repossessions, and defaults can adversely affect your credit as well. Often, these can be more difficult to explain to a future employer or lender than bankruptcy. Delaying filing postpones your recovery time from starting. Make sure and review your situation with a bankruptcy expert to ensure you are filing the correct Chapter of bankruptcy at the best time based on your circumstances.
Applying for New Lines of Credit. Whereas filing for Chapter 13 can make most of your disposable income nonexistence and getting new lines of credit very difficult until your payment plan is completed, with Chapter 7 bankruptcy, you may be able to receive new lines of credit in as little as one to three years. Although the interest rate will be much higher, this will allow you to start re-building your credit by using it responsibly and making payments on time.
State Exemptions. States allow certain property to be exempted from the bankruptcy process. This allows people to keep their homes, cars, and other valuables. For many petitioners, this means they do not have sell any of their property during the bankruptcy process.
Arizona does not follow the federal requirements and allows petitioners filing Chapter 7 bankruptcy to keep the following:
- Up to $150,000 of equity value* for your home;
- Furniture up to $6,000 ($12,000 couples) with some exceptions;
- Up to $300 cash;
- Up to $6,000 ($12,000 for physically disabled) for a vehicle, and couples are allowed two (2) vehicles;
- Various limits for other types of personal property;
- Retirement benefits; and
- A minimum of 75% of disposable earnings (usually increased for low income earners).
* Arizona courts determine home equity by taking the fair market value of the house and subtracting any debts. For example, if your home was valued at $200,000 but you still owed $100,000, you would only have $100,000 of equity in the home ($200,000 – $100,000). This would keep you well below the exempted allowable amount of $150,000 for homes, so you would not have to sell your home to receive a discharge from bankruptcy court.
If you are concerned that you have an item(s) that would be nonexempted that is important that you keep, talk to the professionals at Trezza & Associates. Attorney Trezza may be able to offer a solution, so you can keep the item or least receive some benefit from the item’s value.
Disadvantages of Filing Chapter 7 Bankruptcy
In order to get the fresh start that filing bankruptcy provides, it is equally important to understand the disadvantages of filing Chapter 7 bankruptcy. By better understanding the trade off, you can develop a game plan and recover that much quicker.
Some of the most common disadvantages are the time the bankruptcy is reported on your credit report and the possibility the court appointed trustee will require you to sell some of your nonexempted assets to payoff debts. For a better understanding of how the disadvantages of filing Chapter 7 bankruptcy can affect you, read the sections below.
Time on Your Credit Report. Filing bankruptcy will cause your credit score to take a severe hit, and it will stay on your report for seven (7) to ten (10) years. With Chapter 7 bankruptcy, the recovery process starts immediately once you file.
This means as soon as you file, you should obtain a secured credit card. Use it wisely, make all your payments on time, pay it off every month, and only charge up to 50% of its limit. This will help you start rebuilding your credit immediately. Although the bankruptcy will stay on your credit report for years, you can have a credit score in the high 600s in as little as two years. It will take time, but the good news is with careful planning filing Chapter 7 will give you the fresh start you need.
Required to Sell Nonexempted Property. You may be required to sell nonexempted property in order to pay down your debt. The majority of petitioners do not need to sell any of their possessions. However, if you do have nonexempted property, luxury items like boats or second homes, the court appointed trustee may require you to sell them to pay down the debt you owe, before the bankruptcy court will discharge the remaining debt. However, it is important to have a bankruptcy attorney review your individual circumstances, so you will know what you will need to sell and what you will be able to keep before you enter the court room.
Lose All Credit Cards. You will not be able to keep any of your current credit cards. This can be hard for some people to give up, because they provide a type of financial lifeline. However, once they become part of the bankruptcy process, you are not allowed to continue to use them.
One of the quickest ways to start rebuilding your credit and get a new credit card is to obtain a secured credit card, never charge more than 50% of the limit, make payments on time every month, and use it responsibly. This along with other on time payments and wise credit choices can have a huge impact on your credit score, increasing your score to the 600s in as little as two years.
You cannot file Chapter 7 again for six (6) years. If financial disaster happens again, you will have to wait six (6) years from the date you filed Chapter 7 bankruptcy the last time, before you can file for Chapter 7 again. However, you would be able to file for Chapter 13 bankruptcy payment plan, if needed. There is not a limit on how many times you can file Chapter 13, like Chapter 7. However, each time you file Chapter 7 or 13, it will appear on your credit report.
Does Not Discharge All Debts. There are some debts that cannot be discharged as part of the bankruptcy process. These debts include: back taxes, court judgments, alimony, child support, and student loan debt.
Alimony and child support payments can be changed only by the state family court. The same court that sets them. Bankruptcy court does not have any power to discharge those payments.
The majority of student loan debt is not dischargeable through the bankruptcy court process either. Although in some cases petitioners can ask the bankruptcy judge to discharge their student loan debt based on “undue hardship,” it is extremely difficult bar to meet. In the majority of cases, bankruptcy judges refuse to discharge student loan debt. However, filing for bankruptcy will stop lenders from pursuing collection aggressively.
If you are considering filing bankruptcy to discharge student loan debt, alimony, or child support, schedule a free consultation with bankruptcy specialist Attorney Steven Trezza to confirm it will give you the relief you seek.
May Still Owe Money. There are some debts, such as back taxes, court judgments, alimony, child support, and student loans mentioned above, that survive bankruptcy. Another type of debt that survives bankruptcy is mortgage liens. In Arizona, banks do not issue mortgage liens as part of the process of purchasing a home, because the bank holds the title to the home until the loan is paid off.
However, you will still owe car and house payments on exempted property that you want to keep. Although these debts survive bankruptcy, filing bankruptcy can free up other funds that makes paying these payments more manageable.
The Bottom Line
There are a lot of things to consider when deciding to file bankruptcy. Without understanding the full consequences, filing late or early or filing the wrong type of bankruptcy can have significant penalties that last for years.
Chapter 7 bankruptcy discharges most unsecured debt including credit card debt, medical expenses, and personal loans. It is the most common and quickest form of bankruptcy filed. Although Chapter 7 may not discharge some of the bigger debts like mortgages or student loans, it can free up money that can then be used to payoff the debts that are left, making them more manageable.
It is important to consult a bankruptcy specialist to review your individual circumstances. Timing can be crucial. Also, the type of bankruptcy you file can differ depending on your situation. Through reviewing your situation, a bankruptcy specialist can understand what you want to accomplish through your bankruptcy petition and give you the best advice on how to accomplish it, if possible.
Although discharging all your debts through the bankruptcy process may not be possible, bankruptcy can free up other funds that can be used to payoff debts that are not discharged through the bankruptcy process. It can give you the fresh start needed to build a financially healthy life.