Chapter 7 Bankruptcy: Pros & Cons

Early bankruptcy laws focused on punishing the debtor and repaying the creditor. Eventually, the process evolved into a method of financial rehabilitation, a “second chance” to get your finances right.

There are six chapters of bankruptcy in the U.S. The most common types of bankruptcy are Chapter 7 and Chapter 13, which combined for 98.2% of the filings in 2023. Chapter 7 is the most popular choice for debtors with 262,277 filings in 2023, an increase of 16.8% over 2022.

What Is Chapter 7 Bankruptcy?

The purpose of Chapter 7 bankruptcy is to give people burdened with debt a chance at a fresh start. It’s the quintessential type of bankruptcy. When you hear people in movies, TV or pop culture wanting to “declare bankruptcy”, Chapter 7 bankruptcy is what they are talking about.

Professionally, it’s known as “liquidation bankruptcy” because a bankruptcy trustee collects your nonexempt assets and sells (liquidates) them to pay off creditors. In exchange, most of your unsecured debts, such as medical debt, credit card debt and personal loans are discharged, meaning you are no longer obligated to pay it off.

Certain property is exempt or protected from liquidation. This should include most of the items you will need to work and live, sometimes referred to as “necessities of modern life.”

While Chapter 7 bankruptcy can give you a fresh start, it does come with some severe consequences. It’s wise to weigh the pros and cons and consult a bankruptcy attorney to help you decide if it’s the right move for you.

» Learn More: Pros and Cons of Bankruptcy

Pros of Chapter 7 Bankruptcy

Bankruptcy is designed not as a punishment for financial struggles, but as a way to relieve them. The American Bankruptcy Institute says that 93% of the asset cases closed by U.S. Trustees in 2023 were “no asset cases,” meaning there was not enough equity or value in the property for a trustee to sell it and pay off creditors. Chapter 7 applicants were able to protect all their assets, including home and car, as long as they were able to make on-time payments.

So, if done properly Chapter 7 really can be a “fresh start” for someone and not a time when they lose everything.

Let’s go over some of the other pros of filing for Chapter 7 bankruptcy.

Debt Relief

The undeniable upside to filing for Chapter 7 bankruptcy is the debt relief it provides. It has the power to lift a major burden off your shoulders in just a few months. Most unsecured debt can be discharged, including credit cards, medical bills, and personal loans.

Individuals, self-employed workers, small business owners, and corporations may all file Chapter 7 bankruptcy. Relief is available regardless of how much you owe; there is no max limit that disqualifies you. However, individuals are required, within 180 days before filing, to receive credit counseling from an approved credit counseling agency.

» Learn More: Chapter 7 Debt Limits

No Collections or Repossessions

Filing Chapter 7 Bankruptcy automatically stays collection actions. This forces creditors to stop any lawsuits, wage garnishments, and phone calls. The bankruptcy clerk will alert all creditors whose names and addresses you provide.

No more repossessions or debt collections to worry about.

The Bankruptcy Code lets debtors protect most of their property. This protected property is considered exempt, which means the bankruptcy trustee cannot sell it to pay off your creditors.

Exemptions vary by state. However, most things that are considered necessary for life usually fall under exemptions. Your car, most of your household items including clothes and furniture, and a portion of your home’s equity are often considered ‘exempt.’

Credit Flexibility

If you’re considering bankruptcy, you’re in a tight position and credit is hard to come by. Nobody wants to loan money to underwater borrowers. Once you file and assume the label of bankruptcy, it will be even harder to qualify for any sort of credit. However, after some time, your credit score will rise again, and the more time that passes after filing, the less creditors will hold your bankruptcy against you. Eventually, with a little effort, you will be in good standing once more, but the only way to get there is by sticking out the entire bankruptcy process.

Some lines of credit are easier to get your hands on than others. For this reason, it may be wise to apply for a secured credit card, which can improve your credit score when you pay your bill on time, each month.

Quick & Cheap Processing

Though a Chapter 7 bankruptcy remains on your credit report for 10 years, the process, from initial filing to discharge, should take between four to six months. This is a good thing since the sooner your debts are cleared, the sooner you can begin the road to re-establishing good credit and healthy finances.

Here are some of the fees you will need to pay when you file:

• $245 case filing fee
• $75 miscellaneous administrative fee
• $15 trustee surcharge

Cons of Chapter 7 Bankruptcy

 The consequences of bankruptcy may not be as severe as they were in the past, but it still comes with risks. Chapter 7 bankruptcy can wipe the slate clean, but there are measures in place to make sure the debtor is still held accountable for falling short on his or her agreement.

Here are some of the cons of filing Chapter 7 bankruptcy:

Effects on Credit

A Chapter 7 bankruptcy will tarnish your credit report for 10 years. This will make it harder to apply for credit, which means you may have to hold off on major purchases. Buying a house, returning to school, even applying for a credit card will all become more difficult after you file. Just keep in mind these effects will be in place 10 years.

» Learn More: How Long Bankruptcy Stays on Your Credit Report

Not All Debts Are Discharged

For some, there’s just no escaping all of it. Certain debts will remain on your account when you file for Chapter 7 bankruptcy. You will still be responsible for alimony and child support. Tax liens, student loans, and personal injury debts caused by intoxicated drivers are still in effect, as well.

Loss of Property

Though most people believe they will lose everything in bankruptcy, studies by the American Bankruptcy Institute indicate your property loss will be minimal in Chapter 7.

Trustees are looking for “nonexempt property” they can liquidate to pay off creditors. Examples of nonexempt property would be jewelry, expensive musical instruments, cash in bank accounts, stocks or bonds, stamp, or card collections.

Essentially, this means you will be able to keep most of what you need to get by.

Be aware that exemptions vary by state. For example, borrowers (who have equity) filing in Florida face little risk of losing their home thanks to the state’s homestead exemptions. Check your local laws to verify what qualifies as exempt.

Potential Costs

There is a $245 case fee for filing federal bankruptcy, along with a few other administrative fees. However, you can pay these in as many as four installments. Just keep in mind, the last installment must be made 120 days after filing the petition. You may be able to have these fees waived if your income falls below 150% of the federal poverty guideline.

There is a means test required for debtors currently making over a monthly limit. If you make more than the median monthly salary of your state, then a means test is required to determine if you’re truly in a position that calls for bankruptcy. If the court finds that you make too much to file for Chapter 7, your case may be converted to Chapter 13 or dismissed.

How to Decide If Chapter 7 Is Right for You

Bankruptcy carries an unnecessary stigma. If it feels like you’re drowning in debt and there is no rescuing the situation in the next five years, Chapter 7 bankruptcy is a choice to seriously consider.

Not having the weight of so many financial responsibilities dragging you down every day is a relief you can’t find elsewhere. If you meet the qualifying standards, this is your ticket out, a second chance to make up for the first round of financial mistakes.

But first, look closely at the alternatives. There may be a way to pay off debts through debt management, debt consolidation or debt settlement and avoid the 10-year stain Chapter 7 leaves on your credit report.

If, however, there is no answer to your financial struggles, bankruptcy is a powerful tool that will eliminate debt and get a fresh start.

Consult With a Professional About Your Options

There’s no reason to make this decision solo. Whether you need an expert to guide you through the whole process, or you’re simply looking for free consultation and advice on the best way forward, speaking with a bankruptcy attorney can help clear things up. These are trained professionals who focus their attention on none other than bankruptcy law. This means they can tell you if filing for bankruptcy is wise, premature, or overdue.

Try not to look at bankruptcy as a punishment or something to feel ashamed of. From the modern perspective, which was never the intention.

In 1934, the Supreme Court ruled that the primary goal of bankruptcy was to offer debtors a fresh start, asserting:

“It gives to the honest but unfortunate debtor … a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”

» Learn More: Should You File for Bankruptcy?