While Chapter 7 bankruptcy is a solution for declaring yourself bankrupt to clear your debts, it is extremely serious and not something that you should rush into for any reason.
Before filing for bankruptcy, you should get debt counseling and try:
Only after you have tried and failed with these debt relief strategies should you consider bankruptcy.
What Gets Cleared
People who apply for Chapter 7 bankruptcy have high, unmanageable levels of unsecured debt, which they are unable to pay. Unsecured debt is money given to you on the basis of your creditworthiness, which is the creditor's belief in your ability to pay in full on a timely basis.
Common unsecured debts that will be cleared through a Chapter 7 filing include credit cards, personal loans, and claims made against you. Claims may be to cover personal injury or property damage for which you are responsible and don't have the money or insurance to cover.
Typically, Chapter 7 bankruptcy is aimed at individuals and couples who are in dire financial straits and who need a fresh start. Bankruptcy enables them to eliminate debt and slowly reclaim their credit standing over the long term.
What Doesn’t Get Cleared
Chapter 7 does not cover secured loans. Second mortgages or loans you’ve taken out against the value of your home or car will still stand. With secured loans, you use the value of your home or vehicle as "collateral" or protection for the financial institution. If you don't pay, the creditor has rights to your property, as a way to recover what you owe.
Debts that are not cleared with a Chapter 7 filing include student loans, child support and taxes.
Qualifying for Chapter 7
To qualify for Chapter 7 filing, tou need to have met a series of "financial tests." This includes proof that you have made a concerted and honest effort to arrange repayment of your debts and that you don’t have the means available to meet your current financial obligations.
A bankruptcy lawyer will file the Chapter 7 papers on your behalf and help you navigate the process. He or she will help you sort and present your accounts and debts to the court for judgment. To learn more about hiring a lawyer and the role he or she plays in the bankruptcy proceedings, click here: How to Hire a Bankruptcy Attorney.
While filing for Chapter 7 bankruptcy will reduce your financial pressure for the short term, it has a long-lasting impact on your ability to get credit cards and loans.
Your bankruptcy filing appears on your credit history for a decade. That means if you apply for a new credit card or an unsecured loan within ten years from filing, the creditor will see your bankruptcy information.
You will be flagged as an extremely high risk and will almost always be denied for credit. The bankruptcy on your record will also make lenders think twice before offering you secured loans.
Yet, there is light at the end of the tunnel and you can use this time to recover your financial situation for a brighter future. To learn what happens after your credit history is cleared of the bankruptcy, click here: Life After Bankruptcy.
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