Chapter 7 Bankruptcy - Pros & Cons
Write-Off Debt and Solve Money Problems by Filing for Bankruptcy
May 1, 2009
An increasing number of consumers with serious money problems are filing for bankruptcy to write-off debt. It is important to consider the pros and cons of filing for chapter 7 bankruptcy before proceeding with this debt solution. Whilst personal insolvency alleviates financial pressure, it can also have a negative ramification for credit scores.
Advantages of Chapter 7 Bankruptcy
- Write-off debt. Chapter 7 bankruptcy allows people to write-off debt and resolve money problems. There is no minimum level of debt before this debt solution can be used.
- Speed. The insolvency process only takes in the region of 3 to 6 months.
- Exempt property. Filing for bankruptcy doesn't cause the loss of personal pensions, household appliances, vehicles (up to a certain value) and the tools of the trade necessary for business.
- Adverse credit lenders. Whilst borrowing money is more difficult due to having a poor credit score, there are several adverse credit lenders that may be prepared to offer mortgages and credit cards once a few years have subsequently elapsed.
- Prevents foreclosure. Whilst there is only a provisional hold-up on foreclosure, this provides a homeowner with time to get back on their feet and come up with a viable repayment plan.
Disadvantages of Chapter 7 Bankruptcy
- Credit score. Filing for bankruptcy will seriously affect personal credit scores for the next 7 to 10 years. Whilst this will improve with each passing years, it will be difficult to borrow money for new credit cards or mortgage refinancing.
- Non-exempt property. Certain items cannot be excluded, such as a valuable collection, stocks or a second home or car.
- Means test. Individuals applying for chapter 7 bankruptcy will need to pass a 'means test' based on the median income for that state. However, Best Case Solutions produced research showing that 85 per cent of individuals opting for chapter 7 have an income below the median level.
- Limitations. Filing for bankruptcy is only permitted once in every six years.
- Certain loans. It is not possible to write-off debt from car or student loans, although it can prevent aggressive collection activity from lenders.
- Alimony, child support and taxes. Insolvency doesn't protect someone from money problems caused by alimony, child support or unpaid taxes.
- Mortgage lien. Chapter 7 bankruptcy doesn't remove a mortgage lien.
- Co-signers. Individuals that have co-signed for a low will not enjoy the same protection as those filing for bankruptcy unless they also go down the same route.
- Court decision. A court could decide that an alternative debt solution, such as chapter 13 bankruptcy or a Debt Management Plan is more appropriate. This is likely to happen if the debtor has a reasonable disposable income or assets.
Provided that someone has minimal non-exempt assets and an income below the median level for the state they live in, chapter 7 bankruptcy is a viable option. Whilst filing for bankruptcy does affect someone's credit score for 7 to 10 years, it is likely that their score is already bad as a result of missed or late payments on existing credit agreements.
Sources
American Bankruptcy Institute
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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