Are you considering filing Chapter 7 bankruptcy? If so, you’re probably wondering, “What are the effects of Chapter 7 bankruptcy? Will it ruin my credit? Will I have to give up the few assets that I do have?” The effects of a Chapter 7 depend on different factors, such as the types of debts and assets in question.
Unlike a Chapter 13, Chapter 7 bankruptcy does not take 3 to 5 years to conclude. Instead, it’s rather straightforward and can be completed within months. Chapter 7 is known as the “liquidation bankruptcy” because some debtors have to liquidate their assets in order to pay their debts. If they don’t have enough assets to pay all of their debts, usually the remaining debts are cancelled. Meaning, the debtor no longer has to pay them.
If the idea of selling your car or your wedding rings terrifies you, don’t fret. Most Chapter 7 bankruptcies are in fact “no-asset” bankruptcies and the debtors don’t have to liquidate any of their assets. In many Chapter 7 cases, the debtor’s assets are exempt or otherwise protected from liquidation. However, if you have a boat, a few extra cars, or a second home, the bankruptcy trustee may require that you sell those unnecessary items to pay off your debts.
Are All Debts Dischargeable in a Chapter 7?
With a Chapter 7, debtors can discharge or wipe out many types of unsecured debts, such as medical debt, credit card debt, personal loans, and old utility bills. However, not all debt can be included in a Chapter 7. Child support, alimony, court-ordered fines, student loans and victim restitution cannot be discharged in a Chapter 7.
“What are the negative effects of filing Chapter 7 bankruptcy?” Initially, your credit score can drop by as much as 100 points and bankruptcy is reported on your credit for 10 years. But unbeknownst to many debtors, it is possible to rebuild one’s FICO score into the 700s within two or three years of filing bankruptcy if the debtor is smart and rebuilds their credit wisely.