Recently on our bankruptcy forum a user asked, “I have thousands of dollars of unsecured debt. I have talked to several people who tout the benefits of filing Chapter 7 bankruptcy. I know, however, that it cannot be all good. I need to know more about the downsides of filing Chapter 7 and whether it’s actually a good choice for me.”
Chapter 7 bankruptcy overview
Chapter 7 bankruptcy may allow certain debtors to discharge all or some of their unsecured debt. But before you decide to file Chapter 7 bankruptcy it’s smart to review bankruptcy laws, identify whether your debts might be discharged and understand the ramifications of your decisions.
It’s smart to pause and find out all you can about the process. Too many debtors rush to file without really understanding what they are doing or taking the time to investigate other possible solutions to their financial crisis. With that in mind, let’s take a look at some of the downsides to filing bankruptcy.
Reasons filing Chapter 7 bankruptcy may not be a good idea
- Chapter 7 does not discharge all unsecured debts.
You did not mention what type of unsecured you have, but filing Chapter 7 bankruptcy could be a mistake for you if the debt you have cannot be discharged. For example, if you have only secured debt, child support debt and student loan debt, filing Chapter 7 could be a mistake.
- Chapter 7 will ruin your credit.
Although some debtors already have a very low credit score due to defaults, repossessions, lawsuits, or wage garnishments, other debtors may see their credit score plunge. They may also limit their ability to get new credit and have the bankruptcy remain on their credit report for up to 10 years.
Buying any large item such as a home will also be impossible for several years. Additionally, due to tougher lending laws, you may also have to save a significant amount of money for a down payment if you want to buy.
- You might lose property.
Although some debtors have few assets and are not concerned about liquidation, other debtors may be forced to sell assets and other luxury items that they would otherwise want to keep.
Not only can you lose assets, you can also lose the right to have credit cards and use them for a set time following bankruptcy.
- You have not investigated other options.
As mentioned above, many debtors rush to file bankruptcy without really considering whether there might be a better option for resolving their financial crisis. For example, it could be mistake to file bankruptcy if you have not analyzed your budget, cut your living expenses, considered additional employment to generate more income, or talked to a financial planner about consolidating your debt.
- You think your situation may be worse in the future.
Under some conditions, such as a severe medical crisis, it might be a mistake to file Chapter 7 too soon. For example, if you think you might have more debts in the future that you cannot pay filing now may be premature. In fact, if you complete Chapter 7 now you cannot file another Chapter 7 case for at least six years from the date you last filed for bankruptcy.
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