Friday, 8 January 2021

Filing Chapter 7 Bankruptcy In COVID-19_ Pros And Cons

In this article, I'm going to go through the pros and cons of filing for Chapter 7 bankruptcy. The decision to file for bankruptcy is an excruciating one for most people. And there's a lot of thought that goes into is this the right step? Is this worth it? In this article, I'm going to go over all of those considerations that you may have and some may be that you hadn't thought of.

let's talk about chapter 7 bankruptcy and some of the considerations that go into filing Chapter 7. This is a very difficult decision for pretty much everybody. I always say no one wants to file for bankruptcy. People get into this situation where they feel like that there are no other options, you're losing sleep. Maybe you're getting your wages garnished you're getting sued and things are just getting super stressful and so you're looking for a way to deal with it and deal with it quickly.

So in this article, I want to go over three of the pros three of the good side of filing a chapter 7 bankruptcy, and then three of the things that can negatively impact you about going through the chapter 7 bankruptcy process.

Pro: It Will Eliminate Almost All Of Your Unsecured Debt

Now unsecured debts are debts where there's no collateral or property attached to them. For instance, credit cards, are unsecured debts. Medical bills, personal loans, all of those debts go away completely in a chapter 7 case. Now it's important to note that some unsecured debts do not go away in chapter 7. Taxes, most taxes don't go away. Even though if the taxes are more than three years old there's a possibility they could go away. And student loans, are another big one they typically do not go away. They're typically not discharged in a chapter 7 bankruptcy. 

But other than that if you're dealing with credit card debt and medical bills those kinds of things are causing you the problem or you're being sued by one of your credit card companies or a medical issue or a personal loan. Those things can go away completely there'll be discharged to your bankruptcy and you won't legally be obligated to pay those any further. So that's the first big thing is that it eliminates the unsecured debts. 

Pro: Automatic Stay

The second positive thing about bankruptcy is it has a very powerful tool called the automatic stay. And what this is as soon as you file your bankruptcy case, the court issues an order called the automatic stay that stops all collections. This means everything stops. If they're going to foreclose on your house, that stops. If they're garnishing your pay, that stops. If they're going to repossess your car, it stops. And even phone calls, snotty letters, all the things that creditors do all of that stops as soon as your case is filed. And it literally is immediate. That can give you some peace of mind. Sometimes that's what people need just to be able to kind of think clearly and make good decisions is they just need everybody to be put at bay, stop the lawsuit, stop the garnishments, allow you to really kind of regroup and make a decision going forward.

So the automatic stay that stops all collections is the second thing that the second real positive thing about a chapter 7 filing. 

Pro: It Does Give You A Fresh Start

One of the best things about chapter 7 is it does give you a fresh start. It's kind of cliche. We hear about the fresh start, that chapter 7 offers but it really is. It stops the collections, it gets rid of the unsecured debts and it allows you to start over and rebuild your credit. You're going to take a big hit. I mean there's no doubt about that, but I can tell you off of when I see people who try to do debt settlement on their own, particularly if they have a lot of debt, they actually struggle to recover from that more than people who file for bankruptcy.

Bankruptcy is one point in time. It's the day you file your case. The further you get away from that, the better off you're going to be. Debt settlement, allowing credit cards to be charged off in lawsuits, those can stick around for years and even decades if they get a judgment. So chapter 7 really brings some finality to it. It wipes the debts out. There's one point in time where we know this is when you filed it. And again, like I said, the further you get away from it the better. 

Let's talk about the negative side of things.

Con: You're Going To Take A Credit Hit

There's just no way around it. If you owe money on a credit card or medical bills, personal loans, whatever it is, and you're unable to pay it, the credit is going to be damaged no matter what you do. But with bankruptcy, it's kind of the nuclear option. You are going to take a pretty significant hit anywhere from a 100 to 150 point drop in your credit score. And the bigger issue is it does stay on your credit for 10 years. 

Now, if you look at your credit report, there's a public record section. And the two things that typically show up there are tax liens and bankruptcy filings. That bankruptcy filing will stay there 10 years from the date that you filed your case with the court. Now the good news is it's not going to impact your credit score for that long. Most people recover from as far as their credit score coming back up within about two to three years. Like FHA will do mortgage loans again two years after chapter 7, most other lenders are three to four years. Car loans are available almost immediately. You're just going to have a bad interest rate on that until you get a year or two away from your bankruptcy filing. 

So the downside is, yes, it's going to be on there for 10 years. It can impact credit decisions for 10 years. And frankly, it can impact credit decisions for you longer than that. Because sometimes they'll just ask, have you ever filed? Not if you filed within the last 10 years but the good news is that it's not generally as bad as most people think. I don't ever want to sugar coat it there are definitely credit consequences to the filing, but it's just typically not as bad. It's not as devastating as most people anticipated. 

Con: It's Possible You Could Lose Assets

So with the chapter 7 case, the upside is you're going to wipe out all that debt. All of that's going to go away. The downside is the court or more specifically, the trustee that's assigned to your case is going to review all of your assets that you have to disclose in the paperwork. And they're going to determine if you have any assets that can be sold and then the money be given to your creditors.

Now, the good news is that most assets are protected in most states, they have laws called exemptions. Like most people have heard of the homestead exemption. Most states have exemptions for household goods retirement accounts, cars, those types of things. So most of the general basic stuff that you have is exempt. But if you have a fishing boat that's been paid off for years, and it's your pride and joy. If you file chapter 7, high likelihood something like that's going to be liquidated unless there's an exemption in your state to protect it.

In Arizona, that specific example you would lose the boat. It would go away. So that's one of the downsides to it is it's potential there to lose assets. One way to think about it is, let's say you have $50,000 in credit card debt and you're going to lose a few $1,000 in assets. That's a little bit painful there, but it's also better than you're wiping out all of that credit card debt. 

If I would have told you beforehand that you could wipe out $50,000 of credit card debt by selling your $4,000 boat would you do it? And the answer is yes, you would have jumped at the chance to be able to do that. So you may lose some assets, but I can tell you in most states most things are protected by the exemption laws.

Con: Preferential Payments To Insiders

The third thing that I want to mention as far as the downside is something that some people get caught up in particular people who file bankruptcy without an attorney. And that is, there are certain lookback periods that the court has over certain financial transactions or transfers that you've done over the last couple of years prior to the filing of your bankruptcy. So a big one is what we call preferential payments to insiders. 

Insiders are family members or friends. If you owe money to a family member or friend and often when we get into the financial difficulty that rightly so, that's the first place we go is to see if we have family that can help us out. So they may borrow some money and then we're paying them back. If you owe money to a family member or a close friend, and you've been repaying that debt over the last 12 months prior to the filing of your bankruptcy, the bankruptcy trustee can go and get those payments back over the last 12 months. Particularly if it's a large amount, they're going to go after it. There's just no doubt about it this makes Thanksgiving super awkward. If they have a federal employee coming and trying to get all this money back that you've paid them. So that may be something where you'd either not want to file chapter 7 or delay filing it. And so they don't have that look back period. 

A similar type of thing for what they call fraudulent transfers. This often sounds scarier than it is typically these aren't situations where people are truly trying to be fraudulent. But if you transferred an asset out of your name in the two years prior to the filing of bankruptcy and you got less than what it was worth, and you were essentially the courts calls it insolvent or broke at the time that you did it, the court may be able to undo that transaction. The idea behind this statute is, let's say that, let's use a boat example again. Let's say that you have that fishing boat you're worried about losing it in a chapter 7 bankruptcy. So instead of going into bankruptcy with the boat, you transfer it into your brother's name and then file for bankruptcy. 

The court is aware of this trick. They've done millions of these things over the years. And so what they do is if you've transferred that and you didn't get any money back for it, if you didn't truly sell it, then they can go and they can get that asset back bring it into the bankruptcy estate and then sell it give the money to your creditors. Again, this causes some issues because if you transfer it to a family member particularly or a friend, they're going to get wrapped up in this as the court reaches out to bring that asset back. So, the lookback period can cause a few issues with bankruptcy filings that you got to be aware of. And this is where hiring an attorney and consulting one before you jump into the bankruptcy realm is a big help because these are the types of things that cause people problems, losing assets, preferential transfers, fraudulent transfers.

Those are the things that can really turn into what should be a simple chapter 7. It can really throw a wrench into it and cause you some problems on the road. 


So, those are kind of my pros and cons of a chapter 7 filing. It's absolutely necessary for some circumstances, in other circumstances I think people could put together a payment plan or get work with their creditors to get out of it. 

But it is a very powerful tool it can bring some total organization and structure to dealing with your debts if you find yourself in that situation. 

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