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Things to Consider Before Filing Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy should not be taken lightly. Although it may potentially rid you of the majority of your debts, it does leave a long-lasting stain on your credit history, one that can make it significantly more difficult to get a loan or a low interest rate on a credit card.

If you are considering filing for Chapter 7 bankruptcy, educate yourself about the process and its consequences. You should also contact a Chapter 7 bankruptcy attorney who can help you understand how bankruptcy may affect your life.

Is Bankruptcy Right for You?

Before even considering whether Chapter 7 bankruptcy is right for you, you should first be asking yourself if bankruptcy is right for you.

Ask yourself some of the following questions to determine if bankruptcy is a good option:

  • Do I pay more than my minimum requirement on my bills?
  • Do I foresee myself paying off my debt within the next five years?
  • Am I employed and making a stable income?
  • Has a recent life situation, such as a divorce or an injury, seriously affected my finances?

If you can make more than minimum payments, are capable of paying off your debt within five years, are fully employed, and have no financially disastrous life circumstances, then you might be able to pay off your debts without the help of bankruptcy.

Are You Willing to Part with Your Belongings?

When you file for Chapter 7 bankruptcy, you are liquidating your non-exempt assets. Non-exempt assets include anything that is not exempt under federal or state bankruptcy laws. Non-exempt assets can include a second house, cash, cars, and investments.

Although you will be able to keep some exempt property, much of what you own will be seized by a court-appointed trustee and sold off to pay your creditors. If you do not want to part with some of your assets, then Chapter 7 may not be right for you.

Can You Afford to Pay for Bankruptcy?

When you file for bankruptcy, cost is an issue. It is not free or even necessarily cheap to file for bankruptcy. The initial fees to submit the paperwork to the court range in the hundreds, and for someone that doesn't necessarily have a lot of money, this may be a significant expense.

Do You Foresee Filing for Chapter 7 Bankruptcy in the Future?

If you file for Chapter 7 bankruptcy, bankruptcy law dictates that you must wait eight years until you can file for Chapter 7 bankruptcy again. This means that if you think you will amass more debt than you can handle in the future, Chapter 7 may not be right for you.

Are You Okay Tainting Your Credit History?

Filing Chapter 7 bankruptcy leaves a mark on your credit history that lasts 10 years. This can make it difficult to get loans or to get reasonable interest rates on loans. This means that future credit cards, home loans, and car loans might end up costing you more.

Of course, your credit may have already been damaged if you're unable to pay your bills in a timely manner. A credit counselor or Chapter 7 bankruptcy lawyer can help you understand the current state of your credit and how it would be affected by a bankruptcy filing.

Are You Eligible to File for Chapter 7?

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This law made it more difficult for people to file for Chapter 7 by establishing some new rules.

Specifically, those seeking to file Chapter 7 must pass the means test. The means test is a two-part test.

The first part uses a formula to determine if you can afford to pay 25 percent of your non-priority unsecured debt, which includes things like credit cards. If you can, you are ineligible to file for Chapter 7.

The second part of the test compares your income to your state's median income. If your income exceeds the state's median income, you are ineligible to file for Chapter 7.