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  • Kamini Fox

The True Story About Chapter 7 Bankruptcy

Updated: Feb 16, 2021

The truth a bout Chapter 7 bankruptcy that a debt settlement or debt relief salesperson doesn’t want you to know…

I’m not afraid to be open with you so let me just come out and say, most of the bad things you’ve heard about chapter 7 bankruptcy are not factually correct. Most of the junk I’ve read online is designed more to steer you away from bankruptcy and towards another debt relief product for you to buy than to give you a fair and balanced view of bankruptcy.

And I know about bankruptcy. Myself filed for bankruptcy in 1989 and I help people every day to find good answers for their bad debt problems. Many times the right and best answer is bankruptcy.

Most of the things you will read or hear to scare you about chapter 7 bankruptcy will have something to do with your credit, what other people will think about you, or your moral obligations.

Will Chapter 7 Bankruptcy Really Hurt My Credit?

It is true that a chapter 7 bankruptcy will be reported on your consumer credit report for ten years. But it does not “destroy” your credit. In fact your credit can be easily rebuilt quickly following a chapter 7 bankruptcy.

You will be surprised that immediately following the discharge of your debt in a chapter 7 bankruptcy you will begin to get credit offers in the mail from creditors. Sometimes the offers begin to arrive within days of your bankruptcy discharge.

For some people buried under a mountain of debt, filing chapter 7 bankruptcy actually improves their credit score. You see the ongoing open collection accounts will be closed with bankruptcy and if they follow the right path they will have much better credit fast.

And yes, it is true the filing a chapter 7 bankruptcy will lower the credit score of some, but not all. Let’s put that into perspective. If you’ve artificially kept your credit score inflated by just making the minimum payments and not able to dig out of debt you are really already very underwater. It’s just hidden from your current credit score. If you keep on that same path though, it won’t be long before you will be so deep in debt you’ll never get out.

Most of what I read online that tells lies about chapter 7 bankruptcy is written by companies that are trying to sell you their debt relief product. This includes both for-profit and nonprofit credit counseling companies.

They will tell you things like debt settlement improves your credit. But what they forget to tell you is if you stop paying your creditors to try to settle your debt that will be reported on your credit report for seven years. They also seem to forget to tell you that the amount of debt forgiven will be reported as a bad debt on your credit report.

While credit counselors offer what they call a debt management plan, there is a bit more to it that you need to know. A debt management plan is a monthly payment program where you agree to pay a certain amount, determined by your creditors, each month to the credit counseling group. They in turn divide up that money and send bits of it to your creditors. The credit counseling agency will say it won’t hurt your credit. But there is more to it than just that which they will not tell you about upfront.

Speed Of Recovery

Debt relief companies seem to also fail to mention how quickly their solution will get you back on your feet again. In the case of a debt settlement program, unless you have the cash on hand to settle all your debt in just a few months, many people enroll in programs that are designed to take years.

A credit counseling program is designed to take five years and if you are unable to make your payments along the way you may be dropped from the debt management program and still owe your remaining debt.

A chapter 7 bankruptcy takes a few months for your debt to be completely discharged. It will take a year or so to rebuild your credit, and another year or so for you to be ready to buy a new home or new car again.

The big difference is that rather than years to eliminate your debt a chapter 7 bankruptcy eliminates your debt in months. Months versus years, the choice is pretty obvious. How long do you want to wait to start over again?

The Means Test Won’t Let You Get Approved For A Chapter 7 Bankruptcy

Debt settlement or debt relief sales people and websites will tell you that chapter 7 bankruptcy is harder to file these days. What they don’t tell you is that 70 percent or more of bankruptcy filings are a chapter 7 bankruptcy and that the vast majority, almost all, result in a total elimination of debt in three months or less.

Debt relief salespeople will try to scare you by telling you the chapter 7 bankruptcy means test will prevent you from filing bankruptcy. But that’s really something you need to discuss with a local bankruptcy attorney, not a debt relief salesperson. Having a high income alone does not disqualify for a chapter 7 bankruptcy. There are factors and allowances your local bankruptcy attorney needs to discuss with you to make a determination if you can file a chapter 7 bankruptcy.

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