If you are researching the possibility of filing for chapter 7 bankruptcy (or conducting research on behalf of a relative or friend), then you may have already discovered that the line between fact and opinion can be quite blurry — especially on the web.
To help you get the information you need to make a safe and smart decision, here are clear, factual answers to 5 common questions regarding chapter 7 bankruptcy:
Question: Is filing for chapter 7 bankruptcy better or worse than filing for other types of bankruptcy?
Answer: This question cannot be answered without looking at each individual’s debt situation and available options. Generally speaking, however, many debtors who are eligible for chapter 7 bankruptcy choose this option, because it essentially erases most (and typically all) of their debt. Furthermore, chapter 7 bankruptcy filings are much simpler than other types, because there is no structured repayment plan that must be submitted to creditors for approval.
Question: Who can file for chapter 7 bankruptcy?
Answer: Debtors are eligible to file for chapter 7 bankruptcy if their household income falls at or below the median income for their householder size (as determined by the number of family members occupying the home, not by the square footage of the home) in their respective state. Debtors who do not pass the means test may still qualify for a chapter 7 filing if their average monthly disposal income for the six months immediately prior to filing is below a minimum threshold.
Question: Do debtors need to list all creditors when they file for chapter 7 bankruptcy? What happens if one or more are not listed?
Answer: Yes, all debtors must be listed as part of the chapter 7 bankruptcy filing. However, the court recognizes that mistakes happen, and debtors may unintentionally omit a creditor(s) at the time of filing. What’s more, some debtors may be able to convince their court that they were honestly unaware that a creditor existed (creditors often transfer their accounts receivables to third parties, and fail to notify debtors in a timely and appropriate manner of the change). Provided that the court is satisfied that there was no intent to deceive, the omitted creditor(s) will not be able to pursue the debt as part of a separate action.
Question: Does filing for chapter 7 bankruptcy severely damage a credit score?
Answer: Not necessarily. The reduction depends on a debtor’s credit score prior to filing for chapter 7 bankruptcy. Generally, if a credit score is around 680 prior to filing, it will fall about 130-150 points; while if a score is around 780 prior to filing, it will fall about 220-240 points.
These reductions are not insignificant, and they will have an impact on both the ability to borrow, and the total cost of borrowing. However, the notion that the impact is devastating or permanent is false. After being discharged from bankruptcy, individuals can (and should) start repairing their score by obtaining and properly maintaining secured credit cards. Within a year or so, the credit repair process can be augmented through personal loans and/or vehicle loans. And within a couple of years, obtaining a competitive-rate mortgage is realistic.
Question: Creditors keep warning me about applying for chapter 7 bankruptcy. Why?
Answer: Most creditors (presumably all of them) have an adversarial relationship with you. That is, they are not “on your side,” and as such you are wise to treat any advise — and especially any warnings or threats — with skepticism, since there is virtually no chance that any of it is in your best interests.
Essentially, creditors don’t want debtors to file for bankruptcy, because the moment that happens they (creditors) must follow a strict and transparent legal process. For example, creditors cannot communicate directly with debtors, they must stop all collection activity (including wage garnishment), and they cannot “bully” their way to the front of the line to get paid first, or get paid the most. They must follow rules that are not designed to mitigate losses to creditors, but instead are designed to protect debtors.
With all of this being said, filing for chapter 7 bankruptcy should never be done without careful due diligence and analysis of all options. However, regardless of how debtors proceed, the preferences and objectives of creditors should NOT be taken into consideration, and their advice, threats and/or warnings should not be accepted as valid counsel.
To learn more about chapter 7 bankruptcy, and for an objective assessment on whether pursuing this option is in your best interest (or that of a family member or friend if you are conducting research on their behalf), then contact the Law Offices of Charles Huber today. We have over 30 years of experience on consumer bankruptcy.