When your debt piles up and becomes unbearable, what are your options? You could try to manage it yourself, but as history suggests, that may not be the smartest route. You could take out a personal loan to pay off some or all your creditors and compile your debt into a single monthly payment. You could also file for personal bankruptcy. The options are Chapter 7 or Chapter 13. This blog will cover the details of Chapter 7 bankruptcy.
What is “liquidation bankruptcy?”
Liquidation bankruptcy is the term often associated with Chapter 7. The term applies because this debt-relief option is meant to get rid of your unsecured debt, including credit card debt, medical bills and personal loans. Liquidation also refers to seizing your nonexempt assets to pay off your debt. Each state differs which assets are exempt (can’t be taken) or non-exempt (can be taken.) Covering more than 819,000 cases in 2016, Chapter 7 is the most common bankruptcy filing. Also, over 95% of those who filed Chapter 7 had their debts discharged.
To qualify for Chapter 7, your financial situation should include the following:
- Your debt to income ratio must exceed half your annual income. This means that your debt needs to total more than half of your yearly income.
- Your debt would take a minimum of five years to pay off.
- The debt leaves you with minimal or zero disposable income.
- Your monthly income is lower than the median income of your state.
Pros of Chapter 7 bankruptcy
- Lenders won’t be able to hound you and send your debt to collection.
- Chapter 7 affords the luxury of not having to explain missed payments, repossession or lawsuits.
- It will help you become a better money-manager. To have your debts discharged, you’ll have to manage your debt better.
- Many states list homes or property as exempt assets.
- If offers you a fresh start and a clean slate.
Cons of chapter 7 bankruptcy
- It seriously harms your credit score and will remain on your credit report for up to 10 years.
- Your credit cards will be liquidated.
- Your property will be liquidated if it is not an exempt asset in your state.
- You will often lose luxury assets like your boat or vacation home.
- Alimony/child support payments or student loan debt must still be paid and are exempt from Chapter 7.
- You can only petition for Chapter 7 once every six years.
- Based on requirements, the court could alter your Chapter 7 filing to a Chapter 13 filing. In this case, your path to debt freedom would increase to three to five years due to a repayment plan. It often takes four to six months for courts to discharge a Chapter 7 filing.
Bankruptcy can be a path to a new financial beginning, but mull over the pros and cons to decide if Chapter 7 or Chapter 13 is the right choice for you.