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Potential consequences of Chapter 7 bankruptcy

On Behalf of | Oct 25, 2023 | Bankruptcy |

Overwhelming debt is a problem for many people in Texas. When they are falling behind on their mortgage, credit cards, automobile payments, medical expenses and other debts, it can be a daily struggle with the fear of the future compounded by constant calls from debt collectors.

Those who want to clear their debt might consider personal bankruptcy. The easiest and quickest way to do this is through a Chapter 7 liquidation. In contrast to a Chapter 13 where the debtor will have a repayment plan that lasts for three of five years, Chapter 7 simply clears the debt in exchange for certain properties that will be sold and the proceeds used to repay creditors.

Often, people do not have valuable enough property to take, so they simply go through the process and their debts will be discharged. It generally does not take longer than a few months. Still, there are factors that people should be aware of when they file for Chapter 7. It is important to know the possible implications and if other options are better for their situation.

Understand the discharge and reaffirmation of debt

When filing for bankruptcy, the debts will be listed. When the discharge is granted, those debts no longer need to be paid. For example, if there were significant medical costs from a hospital stay, those debts are gone and the collection attempts will stop.

Still, there are debts are not eligible for discharge. While student loans can be discharged in certain narrow circumstances, they generally cannot be discharged. Nor can child support; alimony; court-ordered payments; debts that were accumulated through fraud; personal injury debts from a drunk or drugged driving incident; and most taxes.

It is inevitable for a person’s credit to be damaged when they get through bankruptcy. The credit report will show the bankruptcy for up to 10 years. Although this will be problematic, people can rebuild their credit relatively quickly in various ways. Getting a secured credit card is one strategy. There will likely be offers for high-interest cards soon after the case is complete. Once the person gets a card, making the payments on time will help improve their credit in a short time-frame.

In some instances, a person wants to keep property instead of letting it be liquidated. To do so, they need to reaffirm the debt. A document will be signed and the debtor promises to repay all or some of that debt that otherwise would have been dischargeable. It is important to keep up with the payments when doing so.

Be prepared for a bankruptcy filing

Bankruptcy is beneficial in that it allows the debtor to get a fresh start. Chapter 7 is particularly useful in the sense that it is completed fast and the person can restart their financial life. Despite that, there are factors to be cognizant of. That includes the chapter that is used. In some cases, Chapter 13 is better for the person than Chapter 7. Regardless, it is important to be fully ready for the case and know what to expect from the beginning.