Downsides of Chapter 7 Bankruptcy
Since Chapter 7 bankruptcy is the most common type of bankruptcy filed, below we discuss some of its downsides.
The Chapter 7 bankruptcy trustee can sell ANY property NOT protected by an exemption.
Bankruptcy exemptions protect the most basic of property, items like:
Cars (at least up to a certain amount)
The state where a debtor files bankruptcy determines the type of bankruptcy exemptions that are available. This is because the Bankruptcy Code - the federal statutes governing bankruptcy - gives each state the option to require their residents to use state law instead of bankruptcy law to protect their assets.
If you own non-exempt property and do not want that property to be sold to pay a portion of your debts, a Chapter 7 liquidation bankruptcy may not be the best fit for you. Rather, a Chapter 13 bankruptcy may allow you to keep non-exempt property.
Chapter 7 bankruptcy does NOT help with expensive car loans if you want to KEEP the car.
Although bankruptcy law allows you to retain your not-yet-paid-off car, even after filing a Chapter 7 bankruptcy, it is likely you'll be stuck with the same car loan, interest rate, and payment amount.
In order to keep the car, filers will likely need to sign a reaffirmation agreement with the car financer that includes the same interest rate on their car loan, and often the filer will owe more than the car is worth. This can significantly lessen the positive impact of your fresh start on your monthly budget.
Chapter 7 bankruptcy does not help with non-dischargeable debt or past due mortgage obligations.
Similar to the car loan discussed above, if you owe non-dischargeable debt, like tax debt or student loans, filing Chapter 7 bankruptcy will not change much. In comparison, a Chapter 13 bankruptcy can be used to pay off non-dischargeable priority debt, meaning when the court enters your discharge, you are truly debt free.
If you have fallen behind on mortgage payments for a home you own, Chapter 7 bankruptcy will not help you catch up. However, a Chapter 13 bankruptcy allows you up to 5 years to bring your home loan current.
Chapter 7 bankruptcy stays on your credit report longer than Chapter 13.
You can start rebuilding your credit score as soon as your Chapter 7 bankruptcy discharge is entered by the court. Yet, the fact that you filed Chapter 7 bankruptcy will remain on your credit report for 10 years.
A Chapter 13 bankruptcy is typically removed from your credit history 7 years after the date that the bankruptcy case was filed.
Making too much money may prevent you from being able to file Chapter 7 bankruptcy.
You may not be eligible to file bankruptcy under Chapter 7 if you have disposable income greater than the limit set by the Chapter 7 means test. It is important to understand how this part of the Bankruptcy Code affects you, because it will help you in determining which form of bankruptcy fits your situation.
Bankruptcy law requires you to prove you do not have the disposable income necessary to commit to a Chapter 13 bankruptcy repayment plan if your household income exceeds your state's median income.
If you do not pass the means test, you are not able to file Chapter 7 bankruptcy.
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