Should you file for Chapter 7 bankruptcy?

If you are struggling with the decision to file for Chapter 7 bankruptcy, you are not alone. Over 450,000 individuals filed for Chapter 7 last year, and they have all been where you are: overwhelmed by debt and not sure what to do next. Chapter 7 is the most popular type of consumer bankruptcy. Here are a few factors to help you decide if Chapter 7 is the right option for you:

 

  • What is Chapter 7 bankruptcy? When you file for bankruptcy, you ask the government to tell certain creditors they can no longer collect on the debts you owe. Chapter 7 bankruptcy generally forgives any debt not secured by collateral, like credit card debt and payday loans. Secured debts include loans backed by collateral, like a house or a car. You can usually keep those items, but you must keep paying those loans. The bankruptcy court does not forgive all debt, including student loans, taxes or any other debt to the government. Many people resist filing because the bankruptcy stays on your credit report for ten years.
  • How do you qualify? First, the court will apply a “means test” to your income and expenses to see if you could repay your debts. If you do not pass the means test, you may try for a Chapter 13 bankruptcy instead. Most people who take the test do pass. You will submit information regarding your income over the past six months. The test will account for a change in employment status. You will also submit your expenses over that period for comparison.
  • Who is Chapter 7 meant to help? Chapter 7 is meant for people in the following situations:
    • People whose problem debts can be forgiven under Chapter 7 because they are qualifying unsecured debts, like medical bills and credit cards
    • People whose debts equal more than 40 percent of their income
    • People who could take extreme measures and still not pay off their debt in under five years
    • People with few assets

For some people, bankruptcy is not the right answer. You can always look into other options for debt relief. For many people, however, Chapter 7 has provided the fresh start they need to take charge of their finances.

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