Chapter 7 bankruptcy, also known as a “liquidation” bankruptcy, discharges unsecured debts, such as credit card debt or medical bills. While this type of bankruptcy can provide relief for individuals struggling with overwhelming debt, there are also several disadvantages to consider before getting help from a lawyer for filing for Chapter 7 bankruptcy.
The negative impact of chapter 7 bankruptcy
One of the main disadvantages of Chapter 7 bankruptcy is that it requires individuals to liquidate their assets to pay off their debts. This means individuals may have to give up their homes, car, or other valuable assets to pay off their debts. For many people, losing these assets is not an option, and they may choose to file for Chapter 13 bankruptcy instead, which allows them to keep their assets while they repay their debts.
Another disadvantage of Chapter 7 bankruptcy is that it can hurt an individual’s credit score. A bankruptcy will stay on an individual’s credit report for up to 10 years, making it difficult for them to get approved for new credit or loans. Additionally, bankruptcy may affect an individual’s ability to get a job, rent an apartment, or secure other types of credit.
Chapter 7 bankruptcy also limits the amount of debt that can be discharged. Certain types of debt cannot be discharged, such as taxes, student loans, child support, alimony, and most fines and penalties imposed by government agencies. This means that, even after bankruptcy, the individual may still be responsible for paying back these debts.
Another disadvantage of Chapter 7 bankruptcy is that it can be a long and complicated process. Individuals will have to complete a credit counseling course before they can file for bankruptcy, and they will also have to provide detailed information about their income, assets, and debts. Additionally, they will have to attend a meeting of creditors, during which their creditors will have the opportunity to ask them questions about their bankruptcy case.
In addition, the eligibility for filing for Chapter 7 bankruptcy is based on passing the “means test,” which compares the individual’s income to the median income of the state they live in. Suppose the individual’s income is above the median. In that case, they may not be eligible to file for Chapter 7 bankruptcy, which can be a significant disadvantage for those struggling with high levels of debt but with a relatively high income.
Finally, it is worth mentioning that filing for Chapter 7 bankruptcy will not solve all financial problems. Even after bankruptcy is completed, the individual will still have to manage their finances responsibly to avoid falling into debt again. This means creating a budget, avoiding overspending, and being mindful of credit usage.