These days, it’s all too easy to get in over your head in debt. A job loss, medical emergency, or even an unexpected increase in living expenses can put anyone in a tough financial situation that quickly spirals out of control.
Filing for chapter 7 bankruptcy is a one option for wrangling wild money problems. Many people avoid taking this measure, however, because the things they heard about it makes them feel filing would do more harm than good.
Here are a few pros and cons about filing chapter 7 bankruptcy to help you decide if this is the right move for you.
Pro: Chapter 7 Immediately Stops Debt Collection Action
Being constantly hounded by creditors is no one’s idea of a good time. Thankfully, when you file chapter 7 bankruptcy, a protection called the automatic stay falls into place that requires creditors to immediately stop all collection action.
For instance, a creditor who is garnishing your wages must cancel the legal order once they’re notified you filed for bankruptcy. If they receive any money from the garnishment in the interim, they must refund it to you.
While the Automatic Stay only lasts for as long as your case is active, the reprieve you get from credit calls and lawsuits can provide you with the mental space you need to plan your next steps in your quest for a better financial future.
Con: The Automatic Stay Doesn’t Apply to All Creditors
Like many things in life, there are exceptions to the automatic stay rule. The state and federal government can withhold your tax refund to pay any outstanding taxes you owed prior to filing bankruptcy, for example.
Other exceptions include:
- Modifications to child or alimony support obligations
- Efforts to collect debts and damages related to criminal actions
- Wage deductions for loan repayments related to pensions, certain retirement plans, and stock bonuses
Additionally, if you have filed for bankruptcy within the previous year, the length of the automatic stay may be limited to 30 days or eliminated altogether depending on the circumstances of your case. It’s a good idea to consult with a bankruptcy attorney for advice if you think one or more of these exceptions apply to you.
Pro: Debt is Permanently Eliminated
During your bankruptcy, your trustee will pay your creditors with money they receive from liquidating your non-exempt assets. Any balances left in your accounts are subsequently wiped out, meaning you aren’t responsible for paying those bills any longer and the creditors can’t come after you for them.
This means the bankruptcy will free up money you can use for other things, such as rent or building up a savings fund. Additionally, the bankruptcy court requires you to complete a debtor education course that teaches important money management skills to help you avoid financial problems in the future.
Be aware, though, any debts secured by collateral typically require you to surrender the property to the creditor (i.e. vehicle repossession). Sometimes, though, you can keep the property if you can pay the creditor the market value of the item. You must obtain the court’s permission to do this, so discuss the issue with your trustee prior to making any arrangements to buy assets.
Con: Some Debts Cannot be Discharged
Some debts are protected by law and cannot be discharged through bankruptcy; so, you’ll still be responsible for paying them after your case concludes.
Non-dischargeable debts include:
- Student loans
- Personal injury lawsuit awards stemming from DUI accidents
- Debts incurred because of fraud or similar criminal acts
- Child and spousal support
- Any debts you omitted from your forms or reaffirm
In some cases, you can still obtain a discharge under special circumstances. For example, you can get a hardship discharge for student loans if you can prove paying them will interfere with your ability to maintain a minimum standard of living.
A bankruptcy attorney can provide information about your options for eliminating non-dischargeable debt, so connect with a lawyer in your area.
Pro: You Can Save Assets
If you’re facing repossession or foreclosure, filing chapter 7 bankruptcy can help you save your assets from being taken by the bank. As noted previously, the automatic stay stops all collection action. So, even if the bank had a repossession order from the court, they can’t do anything until the automatic stay ends.
This gives you time to either get caught up on your payments or work out a new deal with the creditor. For instance, your mortgage company may agree to a loan modification rather than try to sell the home in a bad market where they’re unlikely to recoup their losses.
It goes without saying that you must be able to afford to continue paying for the assets; otherwise, you’ll end up losing the property if you fall behind again.
Con: Some Assets May Be Lost
As noted previously, the trustee will liquidate your assets and pay your creditors any money they get from the process. Bankruptcy laws let debtors exempt property up to a certain dollar amount. However, any property that doesn’t qualify for an exemption will usually be taken.
For example, the vehicle exemption is $1,200 in Wisconsin. If you have a car that’s only worth $500, you can use this exemption to keep the trustee from selling it. However, if you have a vehicle that’s worth $10,000, the trustee will sell the car, give you the exemption amount, and use the rest to pay creditors.
Con: Your Credit Score Will Take a Big Hit
There’s no way around it. Your credit score will take a big hit when you file for bankruptcy. In fact, according to some experts, your score can drop as much as 240 points after undergoing the process. Since the bankruptcy will stay on your report for up to 10 years, it will take a while for the effect to wear off.
Depending on how low your score goes, you may have difficulty obtaining credit. When you are approved for a new credit card or loan, you may be hit with high interest rates and/or unfavorable terms. In some cases, you may be required to have someone co-sign the loan with you before you’ll be approved.
Pros: Rebuilding Credit is Much Easier
While improving your credit after bankruptcy will be challenging, it’s not impossible. In fact, you may find it easier to qualify for certain types of credit, such as secured credit cards, that can help you rebuild your score.
Additionally, the impact a bankruptcy has on your score lessens over time. Not only does the bankruptcy itself become less important, but the discharged accounts will fall off your report as creditors stop submitting updates to the credit agencies about them. You may find your score rebounds much faster than expected, particularly if you’re paying new accounts on time every month.
Con: Filing Bankruptcy Costs Money
Filing chapter 7 bankruptcy in Wisconsin does require you to pay a court fee of $338 plus various minor administrative fees. Attorneys also charge a fee for their services, the amount of which varies depending on the lawyer and where you live. When you’re broke, coming up with all this cash may seem like an impossible task and can add more stress to an already high-tension situation.
The good news is that the bankruptcy court lets petitioners pay the filing fee in installments and may even reduce or eliminate the fee altogether if your income is low enough. Your lawyer may also work with you to develop a reasonable payment plan, so you can get the services you need without putting yourself further in debt.
There are benefits and drawbacks to filing for bankruptcy. If your financial circumstances are dire enough, though, it may be the best option available. Connect with an attorney who can help you decide if filing chapter 7 bankruptcy in Wisconsin is the right solution for you.