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There are many ways people can get into debt in today's economy. You might have lost your job, fallen behind on bills, or fallen ill and had mounting medical bills. Whatever the reason, if you feel like you'll never get caught up and collection agencies are hounding you, it may be time to consider filing for Chapter 7 bankruptcy. This is the most common form of filing bankruptcy for individuals, and it can virtually eliminate your debts, giving you a fresh financial start. But what is Chapter 7 and how does it work?

What Is Chapter 7? A Bankruptcy Attorney Explains

Chapter 7 is also often referred to as a "straight bankruptcy." It is a means to wipe out your current, non-secured debts so that you can begin with a clean financial slate. Your non-exempt assets will be liquidated by the court and sold to pay a portion of your current debts. To qualify, you'll have to pass a "means test" to prove that you fall below a set standard and are eligible to file.

You'll have to list all of your assets as well as your debts, even those that can't be included in the filing, such as child support obligations. The court will review your petition and determine whether they will discharge your debts for you. During these proceedings, a "stay" will be filed and all creditors notified; at this point, they can no longer contact you in any way regarding the money you owe them. This can give you a bit of breathing room and take away some of the stress of being in a financial bind.

What Is Exempt?

There are certain assets or possessions you can keep while the courts take you through the process, including the home you currently reside in, any insurance policies with a cash value, household furnishings and supplies, clothing and tools needed for employment. Other items may also be exempt, including equity in your house up to a predetermined amount, jewelry up to a set value and a portion of your wages as well as any government assistance.

The Benefits Of Filing Bankruptcy

There are numerous reasons your bankruptcy attorney may suggest filing for Chapter 7. First among these is that most of your debts will be discharged within just a few months, letting you get on with your life without the threat of collection companies and the stress of not knowing how you'll pay your bills. When your debt is discharged, you'll also continue to have all the property you need to continue living comfortably, as most of it will be exempt.

The Option To Keep Or Return Your House

If you own a house or car, Chapter 7 allows you to continue paying any unpaid balances on them just as you did before so that you can keep your house and car. If you want to, however, you can turn your home over to whoever holds the mortgage, thereby relieving you of any obligation to continue paying the mortgage. Of course, you'll have to find a different place to live if you choose this path, but if you own too much house with too much debt, renting may be a better option for you until you get back on your feet financially.

But the most important benefit of filing Chapter 7 bankruptcy is the peace of mind you'll have knowing that you are getting a fresh start without thousands of dollars in debt to prevent you from getting ahead in life. If this sounds like a good plan for you, contact a bankruptcy attorney to learn more.

Do not overlook the importance of having a lawyer by your side throughout the process.

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Bankruptcy isn't right for every debt problem. While bankruptcy is a fantastic solution for most people facing serious debt, other options are available that should be used depending on the circumstances. So what are the disadvantages of bankruptcy? There are three disadvantages as to why bankruptcy may not be a viable option.

- Hit to Your Credit Score -

First, a bankruptcy will remain on your credit record for seven to ten years after the discharge and can affect your future finances. However, most people in a bankruptcy situation are already have poor credit - making credit a typical non-factor. A bankruptcy is often looked upon by debtors as a step in the right direction. Credit card companies will typically offer credit almost immediately after bankruptcy.

Unfortunately, the interest rates can be incredibly high - to upwards of 20% or more. Other issues might crop up if you start a business within a few years of bankruptcy and want to obtain business loans through your own name. Again, those with crushing debt probably won't be looking at obtaining business loans anytime in the near future anyway.

- Obtaining Future Loans -

The second disadvantage of bankruptcy is you may be impeded from being able to obtain a home or car loan - or a refinance of a home kept during a bankruptcy. The hit is not dramatic considering the typical benefit.

Most people become eligible for a mortgage or refinance two years after a Chapter 7, or 1 year after a Chapter 13 payment plan ends. If your situation allows you to carry a car or a single home loan through a bankruptcy, your credit will rise much faster.

Obtaining quality used cars even immediately after filing is actually quite easy. There are some upstanding used car dealers who cater to people just out of bankruptcy. You have to look around for a good one though, since some will sell you lemons. A bankruptcy attorney may help you find a dealer who can get you into a quality car for a fair monthly price. I've personally helped people get into cars the weekend after their bankruptcy was filed... so its very possible in many situations if you do have a full time job.

- Too Many Non-Dischargeable Debts -

Finally, not all debts can be discharged. Student loans typically cannot be erased. Child support, alimony, divorce settlements and some income taxes cannot be discharged. If the majority of your debt is made up of non-dischargeable debt, it may be better to use an alternate means of debt reduction.

The biggest reason for choosing a debt solution other than bankruptcy is the size or nature of the debt. For those facing things like credit card debts of around $10,000 or less - credit consolidation is usually a financially better option. After $10,000, the net cost to benefit of a bankruptcy increases dramatically as debt goes up.

If most of the debtor's debts are not dischargeable in bankruptcy, then a bankruptcy may not be beneficial at all. Debt negotiation or short sales may be better for student loan debts, mortgages, or other secured debts.

- Conclusion -

For those in a lot of debt ($10,000 or more), then bankruptcy is an amazing and under-utilized solution. Bankruptcy is not effective in every situation, so make sure you ask around and find out as much information as you can for your own specific situation. Both bankruptcy attorneys, credit counselors and credit consolidators will all try to sell themselves on every debt - so ask around to find the upstanding and honest ones.

Do not overlook the importance of having a lawyer by your side throughout the process.

 Free consultation with our primary.