Chapter 7 Bankruptcy – What is the Truth?

So You Want to Know What is the Truth About Chapter 7 Bankruptcy

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. Not only did I file bankruptcy in 1989 but 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. I even wrote this free guide to show you how to do it.

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 my free guide to rebuild their credit 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. If you want to know more, read Why Enrolling in a Credit Counseling Program Can Hurt Your Credit Score.

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.

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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?

Is Chapter 7 Bankruptcy Immoral?

To that I say, “pfffft.” The argument about morality can be manipulated a number of different ways. Some will say, “It’s immoral to not honor your promises and pay your creditors.” Others think that not taking legal action to protect yourself and your family in the face of tough financial problems is immoral.

I always ask people the following question, ask yourself.

Do you have a greater responsibility to try fix your financial past or your financial future?

The more logical is that it makes better sense to take what you’ve learned from the past and do better moving forward.

Your God Loves Debtors.

This notion that if you file bankruptcy it means you are walking out on debts you can pay is ridiculous. There is nothing that prevents anyone who files a chapter 7 bankruptcy from repaying their creditors after bankruptcy. People don’t file to walk away from their debts. They file to seek protection from creditors, debt collectors, and stop lawsuits for debt they can’t pay so they can deal with the reality at hand. If creditors and collectors were understanding and worked with people, bankruptcy would never be necessary.

After my bankruptcy I sent payments to my creditors and got a strange response. Some could not account for the money I sent and others asked me to stop sending payments. It seems I wanted to pay but they were put out by my efforts.

Your creditors have already factored in the statistical odds of some people not being able to repay their debt. They already know some will default and yes, some will file a chapter 7 bankruptcy. The irony is that while you are fretting and debating filing chapter 7 bankruptcy, your creditors already know it’s coming for some and have factored for it.

Is their a Stigma Around Chapter 7 Bankruptcy?

There is an amount of shame and fear about filing bankruptcy, that is until you put it into context. I carried around the secret of my personal bankruptcy for ten years. You can read the story of how I got outed.

The irony is that what I learned from the experience was I had just wasted a decade living in fear of someone finding out. I didn’t file chapter 7 bankruptcy because I was trying to get away with anything. I filed because i was trying not to be homeless.

When I filed chapter 7 bankruptcy I was just too stupid and dumb to put into context that sometimes life is just not predictable and despite of our best intentions sometimes the stars align to prevent us from meeting our financial obligations. But what about the farmer that plants a crop and it doesn’t rain. Is the farmer a personal failure or is the real context that it just didn’t rain and that was beyond his control.

Sometimes people get laid off, their hours get cut, they have a sudden increase in expenses they can’t meet, etc. Sometimes life just happens.

Those of us that have filed bankruptcy belong to a big club. The difference is that we don’t have conventions, there are not parties, and we don’t have bumper stickers or t-shirts. Hum, maybe we should. It’s not something that we brag about but we should not be afraid of it either.

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.

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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.

Speaking of Success Rates: If you are deciding on a debt relief solution for you, you should know that among debt settlement, credit counseling, chapter 13 bankruptcy, and chapter 7 bankruptcy — the solution that results in the vastly higher number of people actually eliminating their debt is chapter 7 bankruptcy. The success rates of the other solutions are very poor. You can read more about this here.

While I’m talking about it, the debt salesperson is going to pull out all the stops to persuade you from filing chapter 7 bankruptcy and try to scare you.

And you want to know why? It’s not because they are worried about you making the wrong decision, it’s because they earn a sales commission by selling you their debt relief product. If the debt relief salesperson was trying to evaluate your situation in a fair way they’d tell you to use something like the free How to Get Out of Debt Calculator to review your options. They don’t.

They don’t want to do that because as I’ve shown over and over on this site in sales scripts and recruiting ads, the debt relief salesperson is really a telemarketing commissioned salesperson that is looking for the one call close. They don’t want to spend time getting to know you, they want to close the sale, earn their commission, and get to the next call.

Is a Chapter 7 Bankruptcy Right For You

The truth is there is no way of knowing if bankruptcy is right or not right for you unless you talk to a local bankruptcy attorney. You can make a good decision until you get the facts and you can’t get the facts until you talk to a local bankruptcy attorney about your specific situation.

Nearly all bankruptcy attorneys offer a free consultation so you should not hesitate to pick up the phone and talk to a local bankruptcy attorney.

Will I Be Judged if I File Bankruptcy?

The bankruptcy attorney is not going to judge you. They are their to help you. Your creditors are not going to judge you, to them you are a performing or non-performing asset on their books. Deciding to file or filing a chapter 7 bankruptcy is not about being judged, it’s about applying the law to a bad financial situation and using the one legal solution you have a right to use to get a fresh start and second chance to do better.

Filing Bankruptcy is a Legal Right

Chapter 7 bankruptcy is a legal right and tool you have under the law to deal with your situation. A chapter 7 bankruptcy stops collector calls, stops lawsuits, stops wage garnishments, and let’s you start your financial life over.

No other debt relief solution gives you any legal protection and has no power or authority over your creditors. Bankruptcy stands alone in that arena.

The more people know about chapter 7 bankruptcy and the more truth they learn, the more they determine that not checking out chapter 7 bankruptcy with a local bankruptcy attorney would be a mistake.

Don’t make that mistake, meet with a local bankruptcy attorney and get the facts about what bankruptcy would mean for you.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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12 thoughts on “Chapter 7 Bankruptcy – What is the Truth?”

  1. declaring bankruptcy won’t get you off the hook for a debt that’s been secured: a mortgage, a car loan, anything for which you’ve offered security. The good news is that if you can afford your monthly payments, financial arrangements can usually be made with a secured creditor.

  2. I’m currently in a Chapter 13 (payment is too overwhelming) and want to file a Ch 7, but was told I/we make too much. Is this true when our debt (home, car, credit cards, and student loans) exceeds $400,000?

  3. Steve, I appreciate you sharing this information with all of us. I filed for personal BK in the mid 90s when it was rather easy. What you have failed to mention is the fact that to this day when filling out an application for credit or certain types of employment, I am asked “Have you ever filed for Bankruptcy”? The question does not stipulate within the last 10 years. I can also say that it has affected many employment opportunities I pursued that were directly related to employment with Wall St. affiliated firms. A debt settlement program would have spared me this embarrassment. You are right about the credit card offers but also failed to mention that the rates on those cards are similar to what a lot of loan sharks will offer you. I think no matter which decision you opt to do, there are negatives associated with both and choosing the lesser of the 2 evils really comes down to the consequences you decide are the least painful. 

    • A previous bankruptcy may impact some types of jobs, especially financial related. However there has not been a study showing a correlation between bankruptcy filing and job impact. You are correct that some forms do ask if you have ever filed bankruptcy.

      Did your bankruptcy give you the fresh start you needed when you filed?

      I realize you feel embarrassed. I felt that way at one point before my eyes were opened. If you had gone with a settlement approach and defaulted on your debt you would have had defaulted debt on your credit report for seven years and risk the potential of being sued and facing wage garnishments.

      Debt settlement is most appropriate for those that have the cash on hand to settle their debt quickly. Does that sound like your situation back then?

      • Yes, it gave me the fresh start I was seeking and something even much greater, life without credit cards. I have been CC free since 1995 and have learned to live without them. There is little that cannot be done without the right debit card. I also learned how to shop for reasonably priced good quality used cars as well. No CC payments, no Car payments and low car insurance as a result of steering away from newer higher priced vehicles. All in all I learned my lesson well and that you can live without Credit Cards as long as you are not striving to “keep up with the Jones”. 

    • Surprisingly I have been getting reports from several of my clients recently telling me that the credit card offers they are getting are much better than the terms they had with their pre-filing credit cards – even pre-default. I had one shocked client call me last month to tell me that he received an offer that sounded too good to be true from the cc company he discharged $28k in debt in March. He applied for it and called me a couple weeks ago to tell me he got it with a good interest rate and no annual fee. I believe things may be changing.


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