Bankruptcy is a legal process that allows for the reorganization or discharge of debt. Even though it may provide a financial fresh start, it may be stressful and have financial consequences. There are advantages and disadvantages with filing for Chapter 7 that should be considered.
Chapter 7 is known as "liquidation" bankruptcy and is one of the two most commonly used forms of bankruptcy by individuals. Debtors may also file for Chapter 13, which involves reorganization instead of liquidation. Under Chapter 7, many assets become part of a person's bankruptcy estate during the process and non-exempt assets are sold to repay creditors. Exempt assets can include equity in the home, retirement accounts, work equipment, an inexpensive vehicle used for work transportation and low-value personal property.
Some debts may be discharged if they were incurred before the bankruptcy filing, including credit card debt, unsecured personal loans, medical loans, most court judgments and vehicle accidents, late utility bills, vehicle repossession deficiency balances and leases and contract obligations.
Some debts may not be discharged, including student loan debt, unpaid child or spousal support under a separation agreement, civil judgments for drunk driving cases involving injury or death, some tax debt and fines and restitutions for criminal acts.
Advantages to filing for Chapter 7 bankruptcy include stopping the posting of unfavorable information on credit reports, and collection activities, such as wage garnishment and collection calls. It may also temporarily prevent foreclosure or repossession. Filing may provide more leverage in negotiations with creditors. Important assets, such as a home or retirement accounts, are protected. This also provides an opportunity to rebuild and climb out of a deep financial hole.
Filing also has some disadvantages. It may prevent approval for credit cards for several years. If debt is not dischargeable or a debtor wants to keep any secured assets, debtors will still have to pay some money to creditors.