What’s The Downside Of Filing For Chapter 7 Bankruptcy?[yoast-breadcrumb]
What’s The Downside Of Filing For Chapter 7 Bankruptcy?
Filing for Chapter 7 bankruptcy can provide much-needed relief if you’re struggling with overwhelming debt, but it also comes with some significant downsides that you should consider carefully before moving forward.
While Chapter 7 bankruptcy immediately stops foreclosure, repossessions, utility shut-offs, wage garnishments and most collection activities, it also has long-term consequences for your credit and finances. Here are some of the biggest disadvantages to be aware of:
Your Credit Score Will Plummet
Filing for Chapter 7 bankruptcy is one of the worst things you can do for your credit score. Bankruptcy will remain on your credit report for 10 years from the filing date, and can instantly drop your credit score by 100 points or more. This will make it much harder to qualify for new credit, loans or mortgages.
You May Lose Property
When you file for Chapter 7 bankruptcy, a court-appointed trustee is assigned to liquidate (sell) most of your assets to pay back creditors. This can include real estate, vehicles, jewelry, collectibles, investments and other property. While each state has different exemption laws to protect some assets, you may still lose property in bankruptcy.
Your Wages Can Be Garnished
Filing for bankruptcy immediately stops wage garnishments for most debts. However, some debts, like recent income taxes, student loans, alimony and child support cannot be discharged through bankruptcy. The creditors can resume garnishing your wages after bankruptcy even if these debts are included in the filing.
Future Earning Potential Is Limited
While bankruptcy can provide immediate debt relief, it also places limits on your financial opportunities for many years. You’ll have a harder time getting approved for credit cards, car loans, mortgages and other financing after bankruptcy. Landlords and utility companies may require large deposits. Employers often check credit, so a bankruptcy could impact your job prospects as well.
Bankruptcy Stays On Your Credit Report
The negative impact of bankruptcy on your credit doesn’t go away quickly. Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date. This makes it difficult to rebuild your credit or qualify for loans and credit during this time. Even after it drops off your report, lenders can still consider it when approving financing.
You May Still Owe Taxes
Many people file bankruptcy hoping to discharge tax debt, but this is only possible in limited circumstances. Federal income taxes, payroll taxes and state/local taxes cannot be wiped out through Chapter 7 bankruptcy except in cases of extreme hardship. The IRS and state tax agencies can still pursue collection against you after bankruptcy.
Your Bank Accounts May Be Frozen
As soon as you file for Chapter 7 bankruptcy, the court will freeze your bank accounts and you won’t have access to the funds during the proceedings. This can cause major problems if you rely on the accounts to pay rent, utilities, or other living expenses. Work closely with your attorney so you can get permission to use the funds if needed.
You Must Liquidate Retirement Accounts
Some retirement accounts, such as 401(k)s and IRAs, are protected in bankruptcy up to a certain amount. However, you may have to cash out or borrow against retirement funds above the exemption limits to repay creditors. This can leave you with less savings for retirement.
You May Lose Inheritances
Any inheritances or other windfalls you receive within 180 days of filing for bankruptcy may have to be surrendered to the court to pay off creditors. This could force you to give up money from a relative’s estate that could help you get back on your feet.
Bankruptcy Costs Money
It’s a common misconception that filing bankruptcy is free. In fact, the court filing fees, attorney fees, credit counseling courses and other costs associated with Chapter 7 bankruptcy can total over $1,500 on average. It’s an expensive process.
Your Social Life May Suffer
For some people, the shame and social stigma of declaring bankruptcy causes embarrassment that disrupts their personal relationships. Having to give up property and possessions or change lifestyle habits to pay off debts after bankruptcy can also limit social activities.
You May Still Struggle After Bankruptcy
Bankruptcy provides immediate relief, but it doesn’t fix the underlying problems that led to unmanageable debt in the first place. If you don’t change spending and budgeting habits, you may find yourself struggling with debt again soon after bankruptcy.
As you can see, the downsides of filing for Chapter 7 bankruptcy are significant. While it may seem like an easy way to wipe your slate clean, it comes with long-term consequences for your finances and credit. Meet with a reputable bankruptcy attorney to discuss all your options before deciding if it’s the right path for your situation.