The truth behind the myths of Chapter 7 bankruptcy

Many people hesitate filing Chapter 7 bankruptcy due to a variety of rumors and half-truths.

If you are stuck wondering how you are going to pay your mounting bills and other financial obligations that you cannot afford, you may have considered filing Chapter 7 bankruptcy. However, you may not have not gone through with it, because you have heard that you will lose your property, do not qualify and other rumors. In reality however, Chapter 7 is often the help that people in your situation need, so it is important to know the truth about it, rather than rely on what you have heard.

I will lose my important property in Chapter 7

Probably what discourages most people from filing Chapter 7 is the idea that filers lose their property during the process. However, this simply does not occur in the majority of filings. Although there is a liquidation sale during Chapter 7 to pay for the filer's debts, it only involves nonexempt assets. Under federal and Texas law, most of your most important assets such as your house, car, retirement funds and personal belongings are exempt from being sold in Chapter 7. Because the average bankruptcy filer does not have many (if any) nonexempt assets, such as multiple houses, personal watercraft and other luxury items, in many cases, the process results in the loss of no property at all.

After the sale has been held (if there is one), Chapter 7 offers a quick discharge of most of your unsecured debt, such as medical bills and credit cards. This often occurs in as little as three months after filing. Once you have received the discharge, you no longer must repay the debt.

I do not qualify for Chapter 7

You may have also heard that you need to pass a means test before filing Chapter 7 and assume that you would not qualify. Although you must pass a means test, the difficulty in doing so is often greatly exaggerated. As a result, most filers have no problem at all in passing the test.

The test itself initially examines your income. If your income is below the median for a Texas household of your size, you automatically pass it. However, if your income exceeds the median, whether you pass depends on your disposable income, or what is left over after paying basic living expenses and necessities. Although you are ineligible to file Chapter 7 if your disposable income exceeds a certain threshold, this most people in a position to file bankruptcy do not exceed this threshold. Even if you fail the test, you can still seek bankruptcy relief by filing Chapter 13 instead.

My credit will be ruined

You may think that filing bankruptcy is a bad idea, because you would never be able to qualify for a credit card, loan or mortgage again. However, this is simply not true. Although bankruptcy will cause your credit score to take a hit initially, its effect is only temporary. You will find that credit card issuers and lenders will be willing to work with you after your bankruptcy. With continued financial responsibility, your credit score can recover or exceed its pre-bankruptcy levels in as little as two years.

Speak to an attorney

These are only samples of the half-truths about Chapter 7. If you are struggling with your obligations, it is best to get the straight story about bankruptcy. An experienced bankruptcy attorney can outline the pros and cons of the process and assess whether it would be a good fit for your situation.