Chapter 7 Bankruptcy - Advantages and Disadvantages

Chapter 7 bankruptcy is a way of escaping serious debt and achieving a fresh financial start. Approximately 65% of all those who file for bankruptcy do so under chapter 7. The majority of others choose to restructure their debt with chapter 13 bankruptcy.

Advantages of Chapter 7 Bankruptcy

Write-off Serious debt. It is possible to clear credit card debt, medical bills and other unsecured debts without the need for a regular monthly payment.

Exempt property. Not everything is classified as a non-exempt asset. This includes tools of the trade, pensions, a car or a primary residence (up to a certain value).

Speed. This debt solution allows someone to become debt-free in just 4 to 6 months.

Debt counselor. Since the bankruptcy laws were changed in 2005, it is necessary to consult a qualified credit counselor. This guidance can help someone start their new life on a sounder financial footing.

Borrow money. Whilst borrowing money is more difficult after using any debt solution to write-off serious debt, there are several adverse lenders who specialize in helping those with a low FICO score.

Disadvantages of Chapter 7 Bankruptcy

Non-exempt assets. All non-exempt assets will be taken by the trustee, sold and the proceeds disseminated to creditors. Assets that can't be excluded include a second home, stocks and shares and luxury cars.

Not all debts can be excluded. Student loans, car loans, alimony and unpaid taxes cannot be written-off.

FICO score. Credit scores will be affected for a period of 10 years. In practice, provided monthly repayments are maintained on other credit agreements, FICO scores can start to increase after just a couple of years.

Mortgage lien. A mortgage lien cannot be removed as it is secured on a property.

Loan co-signers. Those who have co-signed for a loan will not be entitled to the same court protection.

State means test. Income will need to be less than the state median. If this isn't the case, the court may decide that an alternative debt solution should be utilised to clear serious debt.

Limitations. It is only possible to file for chapter 7 bankruptcy every 6 years.

Individuals struggling with serious debt have a range of debt solutions they can choose from. However, filing for chapter 7 Bankruptcy is one of the most effective ways of clearing unsecured debt quickly and efficiently.

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.