Pros and Cons of Chapter 7 Bankruptcy

Sometimes the only option to deal with intractable debt is to file for bankruptcy. Many people are hesitant to take this step, for fear that it will destroy their life. Bankruptcy does have consequences, some of which are negative. However, bankruptcy gives you a chance at a fresh start, and the purpose is constructive rather than destructive.


Chapter 7 bankruptcy discharges most of your unsecured debts, such as payday loans, credit card bills, or medical expenses. When debts are discharged, it means that you are no longer responsible for paying them. There are some debts that Chapter 7 cannot discharge, such as student loans, taxes, and back child support. However, relief from some of your other problem debts may leave enough money behind to pay back what you owe on these. You do not have to owe debts of any particular amount to file for Chapter 7.

Filing for bankruptcy protects you from adverse actions by creditors by putting an automatic stay into effect. The automatic stay puts a hold on things like lawsuits and foreclosures and prevents creditors from bothering you with phone calls, letters, etc. Bear in mind, however, that the automatic stay is only temporary. Since a mortgage is a secured debt, it is not discharged in Chapter 7 bankruptcy. Therefore, foreclosure actions may start back up once the automatic stay expires. Nevertheless, it may buy you some time to either pay what you owe or make alternate arrangements with your lender.


The major disadvantage of Chapter 7 bankruptcy is that it involves liquidation, or selling off assets to pay off a portion of what you owe. However, this does not mean that you lose everything. Both federal and state laws have exemptions in place for certain types of property. If you own valuable luxury items, such as a boat or a second home, these are likely to be liquidated. However, the exemptions protect necessities.

Another disadvantage of Chapter 7 bankruptcy is that it can stay on your credit record for years, making it more difficult to take out a loan or obtain new credit cards. However, a history of excess debt also harms your credit score, and being free of it gives you the opportunity to keep improving it.

Filing for Chapter 7 bankruptcy is a serious step. You should understand what you are undertaking before you make the commitment. Contact a bankruptcy lawyer who can explain your debt relief options to you.