Pros and Cons of Chapter 7 Bankruptcy

Legal Expert
Sarah Edwards, BS

Sarah Edwards is a professional researcher and writer specializing in legal content. An Emerson College alumna, she holds a Bachelor of Science in Communication from the prestigious Boston institution.

Edited by Hannah Locklear

Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: Filing Chapter 7 bankruptcy can eliminate debt quickly, and a bankruptcy discharge prevents some creditors from continuing to harass you. Also, you can still keep select items of your personal property. SoloSuit helps you evaluate the pros and cons of bankruptcy and provides alternatives to help you resolve debt once and for all.

For some debtors, filing bankruptcy must seem like a backup parachute — when all else fails, it can provide a safe landing.

A bankruptcy discharge protects you from having to pay certain types of debts. But does that mean that bankruptcy is a good option for you? Learn more about the pros and cons of filing Chapter 7 bankruptcy and several alternatives you might consider.

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What is Chapter 7 bankruptcy?

Chapter 7 of the U.S. Bankruptcy Code includes laws that govern the liquidation of assets. Colloquially, “Chapter 7” refers to one of two main types of personal bankruptcy. The other type is Chapter 13.

Chapter 13 bankruptcy is sometimes called “reorganization bankruptcy,” and it allows debtors to keep their assets while working with the courts to repay their creditors. Chapter 7 bankruptcy is a bit more extreme and involves liquidating some of your assets in order to resolve your debts.

Here are some of the pros and cons of Chapter 7 bankruptcy:

Pros and Cons of Chapter 7 Bankruptcy
Pros	Cons
You can wipe out overwhelming debt.	You must meet specific qualifications.
You’ll get relief from debt collectors.	Bankruptcy impacts your credit score.
You’ll get out of debt fast.	Not all debts are covered
You can protect certain assets.	You could lose your property.
You have no maximum debt limit.	You have filing limits.

Now, let’s take a closer look at each of these pros and cons.

Pros of filing Chapter 7 bankruptcy

A Chapter 7 bankruptcy filing can offer several advantages if you’re drowning in debt. Here are some of the pros of Chapter 7 bankruptcy:

You can wipe out overwhelming debt. Easily the greatest advantage of filing a Chapter 7 bankruptcy is that you’ll eliminate all or most of your unsecured debts in a single decision. You’ll be relieved from credit card, medical, and personal loan debts so that you can start to rebuild your finances.
You’ll get relief from debt collectors. If your petition succeeds, the bankruptcy court will issue a bankruptcy discharge. This court order prevents further collection efforts against you, including debt collection phone calls, lawsuits, and wage garnishments.
You’ll get out of debt fast. Most bankruptcy cases are resolved within three to six months. This means that you can get out of debt fast and move on with your life.
You can protect certain assets. While most of your personal property can be liquidated to pay your debts, certain items are exempt. This can include certain household goods, clothing, your car, and your home (depending on their value).
You have no maximum debt limit. This means that you can file Chapter 7 regardless of how much you owe.

Cons of filing Chapter 7 bankruptcy

There are several reasons to pause and think carefully before filing for Chapter 7 bankruptcy. Here are some of the drawbacks:

You must meet specific qualifications. To file for Chapter 7 bankruptcy, you must pass a means test. Under this test, if you make more than the median salary for a household your size in your state, you are not eligible to file.
Bankruptcy impacts your credit score. Chapter 7 bankruptcy will remain on your credit report for up to 10 years. This can jeopardize your ability to secure new loans, and it can take some time to rebuild your credit score.
Not all debts are covered. Filing for Chapter 7 bankruptcy won’t eliminate all types of debts. You can’t discharge obligations such as student loans, child support, alimony payments, or certain types of tax debt.
You could lose your property. Chapter 7 bankruptcy is also called “liquidation bankruptcy,” and for good reason. Bankruptcy proceedings will dictate how your assets are sold and distributed to your creditors. While some items are protected, nonexempt property can be taken from you.
You have filing limits. You can only file Chapter 7 bankruptcy once every seven years. This limit could affect you if you face financial difficulties in the near future.

If you’ve been sued for debt, file an Answer today before addressing your debt.

Find an alternative to filing for Chapter 7 bankruptcy

Filing for Chapter 7 bankruptcy can be a bit like tearing off a Band-Aid. It’s painful at the moment, but once your debts are removed, you can start rebuilding your life. But in the meantime, you risk losing your property and damaging your credit score. Weigh your options and consider alternatives to Chapter 7 bankruptcy.

Here’s a short video that outlines some of your options.

File for Chapter 13 bankruptcy

Chapter 13 bankruptcy may have less of a dramatic impact than Chapter 7. This reorganization option allows you to:

Keep your most valuable assets rather than sell them.
Make monthly payments over time to resolve debt.
Negotiate terms of your debts, such as interest rates.
Remove the bankruptcy from your credit report after seven years.

While Chapter 13 bankruptcy won’t eliminate your debt in one swift action, the impact on your life will be lower. Additionally, it may be easier to handle monthly payments over time in order to resolve your debt once and for all.

We asked a bankruptcy attorney to explain the difference between Chapter 7 and Chapter 13 bankruptcy, which you can watch in the video below:

Settle your debt for less

Many debtors opt for bankruptcy because they just can’t afford to pay their debts in full. However, most creditors are willing to negotiate lower debt settlement to avoid the risk of getting nothing.

SoloSuit can help you negotiate with a product known as SoloSettle. Serving as the digital go-between between you and your creditors, SoloSettle helps you submit offers and reach a settlement agreement that’s less than you currently owe.

Let’s look at an example of how the process works:

Example: Trevor knew he was behind on some of his credit cards, but he never dreamed that things would snowball out of control. He considered filing bankruptcy to discharge his debts — until a friend suggested that he use SoloSettle to negotiate a lower payment. Trevor used SoloSettle to offer to pay 60% of his original debt. His creditor rejected the offer but agreed to accept 65% of Trevor’s total debt. Trevor agreed. Now, he’s working to rebuild his credit and move on with life.

Start using SoloSettle today to resolve your debt.

Consider all of your options

Before you file for Chapter 7 bankruptcy, consider all of your options. While Chapter 7 can eliminate debt quickly, remember that bankruptcy stays on your credit report for up to ten years, so other options may allow you to settle debt for less or work out a payment plan to resolve your debt with less of a personal impact.

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Pros and Cons of Chapter 7 Bankruptcy

Legal Expert
Sarah Edwards, BS

Editor at SoloSuit
Hannah Locklear, BA

Settle with SoloSettle

What is Chapter 7 bankruptcy?