Chapter 7 bankruptcy is a financial tool for those who have become unable to pay their debts. If approved, some types of debts no longer require repayment, allowing the individual to have a fresh financial start.

There are many reasons why bankruptcy may be the best decision for you. It could be the route to take if you’ve exhausted all other methods of paying off your debt. Before you make that decision, consider a few reasons why this may be a choice.

Repayment of Your Debt Would Take Years

One of the most common reasons to turn to Chapter 7 bankruptcy is when you can no longer make payments on your debt, and making minimum payments would mean repaying that debt for 10 or more years. For many people, it makes sense to file for bankruptcy because it eliminates that debt, and within 3 to 5 years, you may be able to rebuild a stronger credit score. Otherwise, you could spend years trying to dig yourself out of debt without the ability to improve your financial health.

If your credit score is already damaged and unlikely to improve because you have so much debt, filing bankruptcy could be the best option when considering the long-term outcome. However, that doesn’t mean it will be easy for you since you may not have access to credit for some time. 

You Cannot Afford Your Home or Sell it

In some situations, Chapter 7 becomes a benefit to property owners who cannot afford to pay their mortgage and have an upside-down mortgage. That means you owe more on your loan than it’s worth. In this situation, selling the home wouldn’t cover the debt owed. Sometimes, Chapter 7 can help with debts like this. It may allow for:

  • A stop was placed on the foreclosure process for a short period of time
  • Renegotiation of the terms of the loan with the lender and the support of the bankruptcy court (this may be easier to do under Chapter 13 bankruptcy)
  • The lender to take back the home to sell it (often through foreclosure) 

Key here is that if you cannot afford to make payments on your home, bankruptcy may help you to get out from under that loan, providing financial freedom from that debt.

You Have Significant Medical Debt

One of the most common times when people need to file Chapter 7 is when they have a significant amount of medical debt, such as from an illness or a serious injury. Since medical care can cost thousands of dollars in the long term, getting out of this debt can be challenging.

It is important to note that you may be able to work with your debtor to minimize what is owed due to financial hardship. If you have medical debt, credit card bills that built up due to being in the hospital, and other types of debts, though, Chapter 7 can be a helpful tool.

Your Business Failed

If you started a business, you may have obtained loans and used personal assets to help you to get it started. If the business fails, you are still on the hook for those debts. It may be possible to file Chapter 7 bankruptcy if you have a lot of personal debt that stems from your business failure, especially if you are a sole proprietor or in a partnership. Talk to an attorney about this type of debt if you’ve incorporated the business. 

There Are Limits to What Can Be Discharged

Not all types of debts qualify for bankruptcy discharge. In some situations, you will not be able to discharge child support, alimony, some types of taxes, and student loans. You may also be required to repay debt acquired through fraud as well as any judgments against you.

Determine If You Qualify

It’s not enough to simply say that you no longer want to repay the debt you owe. You also have to be sure you are eligible to file for bankruptcy. That means you will need to pass the means test, which considers your income, as well as meet any other requirements set by your state. Even if your income is higher than the allowed limit by your state, there may be other options available to you. That may include Chapter 13 bankruptcy, which is a reorganization of your debt.

Getting Your Questions Answered

Making the decision to file for Chapter 7 bankruptcy requires a careful understanding of the rules and requirements. Meet with Clark & Washington PC Attorneys & Counselors at Law to discuss your case fully.