If you find yourself in financial trouble, it's easy to assume you can file for Chapter 7 bankruptcy as a means of escaping your debt and starting fresh.
While there are many benefits of Chapter 7 bankruptcy, e.g., the ability to discharge most of your debts, you shouldn't move forward under the assumption that there are no drawbacks.
There are drawbacks to Chapter 7 bankruptcy, including the following:
- Long-term impact on your credit score. A Chapter 7 bankruptcy filing will remain on your credit report for 10 years, making it more difficult to establish any type of loan or credit card. Fortunately, even with this on your credit report, there are things you can do to gradually improve your score.
- You can lose property. Many types of property are exempt from sale, but this doesn't hold true across-the-board. It's possible you may have to part with some of your possessions.
- It can impact your ability to file for bankruptcy in the future. If you file for a Chapter 7 bankruptcy now, you'll have to wait at least six years before you can consider doing so again. This isn't to say that you want to continually file for bankruptcy, but it's possible you could find yourself in an even worse situation down the road.
- It doesn't eliminate all your debts: Many people assume that Chapter 7 bankruptcies will relieve them of student loan debt, child support responsibilities and alimony. This isn't true, as your filing doesn't have any impact on these financial obligations.
- Your case could be converted to a Chapter 13 bankruptcy. If you have a certain level of disposable income, it's possible for the court to convert your case. With Chapter 13 bankruptcy, the process lasts anywhere from three to five years since you're required to pay down debt through a court-approved repayment plan.
Although there are potential drawbacks to filing for a Chapter 7 bankruptcy, most consumers realize that the negatives don't outweigh the positive benefits. Furthermore, just because you file doesn't mean you'll run into these drawbacks. They're simply worth noting upfront, so that you make the best decision for you and your finances.
If you're ready to proceed with Chapter 7 bankruptcy, learn more about the process and your legal rights as a consumer. The knowledge you collect will work in your favor.