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Weighing your choices: Is it time to file Chapter 7?

Is it time to declare Chapter 7 bankruptcy? Or, should you pull yourself up by the proverbial bootstraps and tough out the next few years hoping your finances improve?

It's a tough choice, and -- ultimately -- you're the only one who can make it. However, that doesn't mean you have to make the choice wearing a blindfold -- consider both the positives and negatives of Chapter 7 before you decide.

The Downside

Chapter 7, which is often called "total" bankruptcy because it wipes out all of your debts (with a few exceptions) and gives you a clean slate, can sound wonderful when you're exhausted from a lot of nasty calls from creditors and ankle-deep in unpaid bills.

However, there are some downsides:

  • Your credit score will be damaged, killing your chances at certain loans and definitely increasing interest rates on those you do get.
  • You may lose a few luxuries if you have some excess property that the trustee could sell to satisfy part of your debts.
  • You'll have to learn to live without credit for a while.
  • You can't get rid of student loans (usually), child support or spousal support.
  • You have to meet a financial means test, showing that you really don't have the money to pay back your creditors, even through structured payments in a different form of bankruptcy.

The Upside

On the other hand, people wouldn't file for Chapter 7 bankruptcy if it were all bad. Those calls and letters from your creditors do stop, for example.

Here are some of the other upsides:

  • If you've already maxed out your cards, you don't exactly have access to credit now -- so you aren't losing much.
  • Your utilities can't be shut off once you file.
  • All the late payments and defaults are going to damage your credit anyhow. There are companies that specifically help people who have filed bankruptcy get credit again after a short period of financial responsibility.
  • Most people meet the financial means test and very few have to give up any significant assets.
  • It may keep you from losing your home if you can catch up the mortgage or work out an agreement with the lender.
  • If you aren't likely to get into a repeat financial situation, it is the quickest way to move on.

An attorney can provide more specific advice about your case today.

Source: FindLaw, "Pros and Cons of Declaring Bankruptcy under Chapter 7," accessed Aug. 23, 2017

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