Deciding whether or not to file for bankruptcy is a struggle for many.
The idea of getting all your debts eliminated is appealing, but, bankruptcy makes people nervous. Chapter 7 bankruptcy in particular can be intimidating because many people believe it will ruin your credit forever. And while any bankruptcy affects your credit, you may find Chapter 7 gives you a new beginning, rather than an ending.
Below are some pros and cons to consider when looking at a Chapter 7 bankruptcy.
If you have additional questions about Chapter 7 bankruptcy and want to see if a filing is a good fit for your situation, contact the experienced Cleveland bankruptcy attorneys at Luftman, Heck & Associates. We will work with you to determine your best options.
Call (216) 586-6600 for a free and confidential consultation.
The Pros and Cons of Filing for Chapter 7 Bankruptcy
While a Chapter 13 bankruptcy is essentially a repayment plan, Chapter 7 bankruptcy, also known as liquidation bankruptcy can clear away many types of unsecured debts. This can help reset your finances, but you may have to sell some of your possessions, and it will have a long-lasting impact on your creditworthiness.
Here are some advantages and disadvantages of filing for Chapter 7 bankruptcy to consider:
Chapter 7 Bankruptcy: The Pros
You get a fresh start. Chapter 7 is the most common type of bankruptcy, and for a good reason: It eliminates most unsecured debts. If you cannot make it through the month without your bank account falling into the negatives, this can be very attractive. Suddenly having many of your debts erased gives you a fresh start.
You keep assets. The bankruptcy law allows for certain exemptions on your personal property. This lets you to keep some assets that are valued within a certain dollar amount. For example, Ohio has a Homestead Exemption and exemptions for cars, retirement accounts, and cash. In addition, if you and your spouse file bankruptcy jointly, the state allows you to double the amount on your exemptions.
You avoid a repayment plan. In a Chapter 13 bankruptcy, the court sets up a repayment plan, letting you to pay off most of your debts in a 3-5 year period. In Chapter 7, however, you are not tethered to a repayment time period. Once your discharge is awarded, the proces is complete.
You may get to keep tax refunds. Depending on the tax year, you should be able to keep a tax refund after you file. If the tax year is the same year the bankruptcy was filed, the refund is based on income you earned after you filed, so you could get some or even all of your refund. If the tax year is after your bankruptcy was filed it will not be affected by your bankruptcy, so you will get to keep the whole refund.
The process is fast. Typically, your case takes 4 months, from the date you file until the date your discharge is awarded. What’s more, once you file for bankruptcy, you receive an automatic stay. This prohibits your creditors from contacting you and trying to get you to make payments while your case is processing. This means you can get yourself out of debt and start rebuilding your finances in a relatively short period of time.
Chapter 7 Bankruptcy: The Cons
Your credit suffers. A Chapter 7 bankruptcy remains on your credit report for 10 years. It lowers your credit score, which can make it harder to get a credit card or take out a loan.
Not all of your debt is forgiven. Bankruptcy discharges unsecured debts, which are categorized as priority and nonpriority. Your priority debts are typically not discharged in a Chapter 7 bankruptcy. These debts include items like child support and/or alimony, as well as taxes. There are some unsecured nonpriority debts that are not discharged. Student loans, for example, are considered a nonpriority debt but are often not discharged in bankruptcy.
You might have to give up your house. If you are behind on your house payments when you file for bankruptcy, there’s a good chance your mortgage company will request that the bankruptcy court take them out of your bankruptcy. Once they are granted this request, they will pursue a foreclosure of your home.
If you are deeply in debt, chances are you won’t be able to make good on your past due mortgage payments, so your mortgage company may successfully foreclose. If you’re not far behind or own your home free and clear, you can still pursue a Chapter 7 bankruptcy and might get to keep your house, depending on its value.
You may not qualify. – Not everyone can file for bankruptcy. To see if you qualify, you have to go through a “means test,” which is based on your income.
A Chapter 7 bankruptcy is for people financially unable to pay off their debts, so those with little to no disposable income have a greater chance of qualifying. If your means test shows you have more disposable income than you thought, you may not qualify for a Chapter 7 bankruptcy.
You could lose valuable assets. – You will likely need to liquidate nonexempt personal property to pay off the secured debts you still owe. While you can keep many assets, you stand to lose some items that are valuable. For example, if you own your home free and clear, and it is valued at $250,000, then the court could view it as a $250,000 asset that can be sold to pay your debts. (Conversely, the court will not sell off any assets that don’t hold any value.)
Our Cleveland Bankruptcy Lawyers Can Help
Keep in mind that every bankruptcy is as uniquie as the people involed. You likely have a lot of questions about how filing would impact you specificaly. That’s why it’s wise to seek help from a professional bankruptcy attorney, who can look at the particulars of your situation and help you make a final decision. We are here to help you find the right option that gets you where you need to be.
At Luftman, Heck & Associates, we will walk you through these considerations and help you and your family decide which option is the right one for you, whether it is Chapter 7, Chapter 13, or another avenue entirely.
Call Luftman, Heck & Associates at (216) 586-6600 to set up a free consultation. We are ready to support you through the entire process to get you back on your feet.