Chapter 7 bankruptcy, also called liquidation bankruptcy, is a type of bankruptcy in which you can have some or all of your debts eliminated. Typically, there are only a few forms of debt, namely student loans, tax debts and spousal or child support, that cannot be discharged.
If you are in over your head with unsecured debts, like credit card debts, then bankruptcy might be a good option for you. It may have a negative impact on your credit score for the short term, but it does allow you to start fresh without the weight of debt on your shoulders.
Do you lose everything in a Chapter 7 bankruptcy?
One common myth is that you'll lose all you own in a Chapter 7 bankruptcy. The truth is that you may have to give up some assets, but there are exemptions for things like a necessary vehicle, certain clothing items, your home and more. The point of bankruptcy isn't to make you start over, it's just to give you a fresh start.
What kinds of debt will Chapter 7 bankruptcy eliminate?
Chapter 7 bankruptcy usually eliminates unsecured debts such as medical bills and personal loans. It can completely eliminate credit card debts, too.
Keep in mind, however, the your bankruptcy will be on your credit reports for 10 years. As a result, it will be more difficult to get credit for several years after you file, but it's by no means impossible. Usually, people see their credit scores begin to recover within a few months of the bankruptcy. Within a few years, it's normally possible to get a home loan.
How do you get a Chapter 7 bankruptcy?
To obtain a Chapter 7 bankruptcy, you will have to pass a means test to show your expenses, assets and income. You will also need to prove that you haven't had another bankruptcy in the last six years (Chapter 13) or eight years (Chapter 7).
Debt can be overwhelming, and it can be hard to decide what to do. Of course, the myths that surround using Chapter 7 bankruptcy for credit card debt makes it seem like you'll be losing more than you gain, too, even though that's not necessarily the case.
The good news is that your attorney can help you learn more about your debt-relief options before you choose bankruptcy. There may be other alternatives if you don't think bankruptcy is right for you.