Chapter 7 bankruptcy may be what you need to get relief from debts you cannot repay. The fresh start you can get from discharged debts under Chapter 7 can help you get back on your feet financially and give you peace of mind.
At the same time, there are some drawbacks, including the fact that you must first qualify to file for Chapter 7 bankruptcy.
This post covers the benefits and potential drawbacks of using Chapter 7 bankruptcy as part of the bankruptcy process.
If you need help choosing a bankruptcy option, please call Stone Rose Law at (480) 739-2448 or use our contact form to get in touch with a bankruptcy attorney.
For most people, the advantages of Chapter 7 bankruptcy in eliminating most or all debt clearly outweigh the possible disadvantages.
The bankruptcy automatic stay feature can feel like a lifeline, especially when you’re facing aggressive collection efforts, wage garnishments, or the threat of repossession from creditors..
The automatic stay in a Chapter 7 stops repossessions, garnishments, and harassing phone calls from creditors and collection agencies.
But that is not all.
Chapter 7 is the fastest way under bankruptcy law to put many if not all your debts behind you, no matter how much you owe.
Under Chapter 7, you can be completely free from many kinds of unsecured debts within four to six months after filing your petition with the bankruptcy court.
Chapter 7 can even help you get out of some secured debts, like car loans, and in rare cases, you can even discharge some income tax debts or student loans.
There is no dollar limit on how much debt you can discharge under Chapter 7.
The concept of liquidation in Chapter 7 is that to partially pay off your creditors, the bankruptcy trustee has the authority to sell, or liquidate, some of your property.
Still, Chapter 7 includes exemptions, federal or state protections of your personal assets against the collection of creditors. For example, the homestead exemption allows you to keep your home to a specific amount of equity. Most homes are protected in full. Most or all of your household goods which include furniture, appliances, and electronics are protected.
Other protected personal assets include your car, clothes, one bank account up to a certain amount at the time of filing, and retirement accounts, like any IRA or 401(k).
In the short term, it is inescapable that a Chapter 7 bankruptcy will have an initial negative effect on your credit record. (The recovery is fairly quick.)
And it will stay on public records for 10 years.
However, if you are careful in your spending habits and manage credit wisely, you will soon start rebuilding your creditworthiness within a year of filing.
A trick for quick recovery is obtaining a secured credit card, making small purchases, and paying them off promptly. The timely secured payment will make a greater impact on your credit score than a regular credit card payment.
Once you begin to establish a record of timely and consistent payments, your credit score will improve, enabling you to move up to more favorable credit terms and lower interest rates.
The short-term credit hit you take with a Chapter 7 is better than having an indefinite collection of default judgments, collection actions, and garnishments on your record.
We have already touched on some of the possible downsides of resorting to a Chapter 7 bankruptcy petition, such as the possibility that you may have to part with some of your property or assets through liquidation and a 10-year presence on your credit report.
Here is a more complete description of the possible drawbacks of declaring bankruptcy under Chapter 7.
Chapter 7 bankruptcy is not always available to everyone.
Most notably, if you make too much income, you may not qualify under the Chapter 7 “means test.”
This does not mean you cannot declare bankruptcy; usually, those who cannot pass the means test can still receive bankruptcy protection under Chapter 13.
Right after your Chapter 7 discharge, you’ll quickly qualify for credit cards, personal loan, and vehicle loans. However, the interest rates will be higher until your score recovers within the next year.
If your long term goal is to purchase a home, it will take about two years to qualify for an FHA mortgage and three years for a conventional mortgage. This timeline is shorter for VA mortgage loans. We recommend our clients to start working with a mortgage loan officer at eighteen (18) months after filing if this is a goal.
Some debts will stay with you even after a Chapter 7, depending on your circumstances. Examples include:
*Student loans may be discharged through a separate action. It is best to consult with your Attorney on whether you are a candidate for this.
Although many Chapter 7 cases are what bankruptcy attorneys and trustees call “no asset cases,” meaning there is nothing to liquidate, in some cases, you may be subject to having to part with some belongings and assets in a trustee sale.
Examples may include:
In connection with a Chapter 7 bankruptcy, you will need to pay a court filing fees.
No matter which kind of bankruptcy option you may be considering, filing for bankruptcy is something you should carefully consider in advance.
Each type has advantages and possible disadvantages, and depending on your circumstances, you may not need to resort to bankruptcy.
The table below sums up some of the major considerations that go into your decision whether to file for bankruptcy in general, and filing Chapter 7 bankruptcy in particular.
| Factor to Consider | Chapter 7 Advantages | Possible Disadvantages |
| Automatic stay | Stops creditors and debt collectors from contacting you, wage garnishments, collection lawsuits, and repossession efforts. | None. |
| Whether you can keep your assets | Multiple exemptions are available under Federal and Arizona law to protect your personal assets. | Some luxury assets may still need to be liquidated in a trustee sale to pay your creditors. |
| Speed of debt relief | Chapter 7 bankruptcy usually takes only a few months to discharge many debts. | None. |
| Effect on your credit rating | A Chapter 7 bankruptcy will eliminate debt and stop all future negative reporting of the debts you owed at the time of filing. This allows for a quick credit score recovery. Your credit score can recover into the 700s as quickly as one year after filing. | A Chapter 7 bankruptcy will remain on your credit record for 10 years, while a Chapter 13 stays on your record for seven years. Interest rates on credit cards, car loans,a nd personal loans will be higher after filing. It will take two years to qualify for a mortgage. |
| Some debts may not be dischargeable | By discharging at least some of your other debts through Chapter 7, with your disposable income you can be in a better position to pay any non-dischargeable debts that remain. | Alimony, child support, and tax debt will remain. If you have a car or home you have financed, the loan will remain after the bankruptcy if you wish to keep the home or car. Student loans can be difficult to discharge under Chapter 7 without proving undue hardship. |
| Not everyone can qualify for Chapter 7 in all situations | Even if you cannot qualify for Chapter 7 debt relief, such as if you cannot pass the means test, Chapter 13 bankruptcy is likely still available. | An option other than Chapter 7, like Chapter 13 bankruptcy, will preclude some debts from being discharged outright, and you may need to resort to a payment plan instead. |
An experienced bankruptcy attorney, like one at the Stone Rose Law Firm, can help you thoroughly review your current financial situation and understand all your debt relief legal options, including alternatives to bankruptcy.
The bankruptcy attorneys at Stone Rose Law are here to help anyone in Arizona with their bankruptcy filing needs.
To schedule an initial consultation with an experienced Arizona bankruptcy lawyer, call us at (480) 739-2448 or use our contact form.
