Why Should I File a Chapter 7 Bankruptcy?
Filing Chapter 7 bankruptcy in Philadelphia, Pennsylvania, gets rid of debts you cannot afford to pay. It gives you a fresh start to recover from a financial crisis. Filing a Chapter 7 bankruptcy can protect some property from creditors while allowing you to rebuild your finances.
However, there are pros and cons of filing bankruptcy under Chapter 7. Before deciding if Chapter 7 is right for you, contact our Philadelphia bankruptcy lawyers to discuss your situation. At Cibik & Cataldo, P.C., we offer free consultations. Get the information you need to make the best decision about your debt relief options from experienced bankruptcy attorneys in Philadelphia.
In this article, our bankruptcy lawyers discuss why you should file a Chapter 7 bankruptcy. We also discuss Chapter 7 topics including:
- Most Common Reasons for Filing Chapter 7 Bankruptcy
- Why Should I File a Philadelphia Chapter 7 Bankruptcy?
- What Is a Chapter 7 Bankruptcy Discharge? What Debts Can I Get Rid of in Chapter 7?
- Do I Qualify to File a Chapter 7 Bankruptcy Case?
- Benefits of Filing Chapter 7 in Pennsylvania
- Will I Lose My Property if I File a Chapter 7 Bankruptcy Case?
- Is There Life After Filing Chapter 7 Bankruptcy? – Rebuilding Credit
Most Common Reasons for Filing Chapter 7 Bankruptcy
Individuals, spouses, and businesses can file under Chapter 7 of the Bankruptcy Code. If a business files Chapter 7, the business closes and the assets are liquidated to pay business debts. When individuals and couples file under Chapter 7, they eliminate most unsecured debts.
Common reasons people file for Chapter 7 bankruptcy relief include:
- Medical debts or credit card debts
- Decreases in household income
- Unemployment or job loss
- Becoming disabled
- Illnesses, accidents, and injuries
- Loss of a spouse
- Divorce or legal separation
- Failed business ventures
Each person’s situation is unique. Your reason for filing a Philadelphia Chapter 7 bankruptcy case may be different from any of the reasons listed above. Regardless of the reason for filing Chapter 7, the goal is the same. To eliminate debts and get a fresh start.
Why Should I File a Philadelphia Chapter 7 Bankruptcy?
Struggling with debts that you cannot pay is stressful. Stress can cause increase your risk of developing several conditions, including high blood pressure and insomnia. The stress caused by financial problems can impact your job performance and your family. Getting rid of debts by filing bankruptcy can reduce your stress level.
Filing bankruptcy also gives you a fresh start to recover from a crisis that you did not foresee. Everyone experiences situations that can cause a financial hardship. In some cases, a person may not be able to repay debts, no matter how diligent they try.
The Bankruptcy Code was created to give individuals the ability to recover from financial hardships without losing everything. In the 1934 U.S. Supreme Court decision in Local Loan Co. v. Hunt, 292 U.S. 234, 244, the court said that bankruptcy gives an honest but unfortunate person a clear field for future effort and a new opportunity in life free from the discouragement and pressure of preexisting debt.
If you have debts that you cannot pay, you deserve a new opportunity and a chance to overcome your debt problems. Filing a Chapter 7 bankruptcy give you that chance. However, before you file a Chapter 7 case, you need to know some important facts about Chapter 7 bankruptcy cases.
What Is a Chapter 7 Bankruptcy Discharge? What Debts Can I Get Rid of in Chapter 7?
A bankruptcy discharge releases you from legal liability for a debt. When a debt is discharged in bankruptcy, the creditor cannot take any action to collect the debt. Therefore, filing Chapter 7 bankruptcy stops debt collectors and creditors from filing debt collection lawsuits, garnishing wages, seizing property, or harassing you with telephone calls and letters.
However, a bankruptcy case only discharges certain debts. Most unsecured debts are discharged in bankruptcy. Debts that may be discharged in Chapter 7 include:
- Medical bills
- Credit card debts
- Personal judgments
- Old lease and rent payments
- Some old tax debts
- Old utility bills and cell phone bills
You cannot discharge recent income tax debts, child support, alimony, and most student loan debt. However, student loan debt can be discharged if you can prove that paying the debt would create an undue hardship. It is a difficult burden of proof, but it is possible in cases where the debtor cannot return to work because of a disability.
Chapter 7 bankruptcy does not get rid of secured debts, unless you surrender the asset. Therefore, if you owe more on your car or your home, you can surrender the asset in Chapter 7 in full satisfaction of the debt. The creditor cannot sue you for money owed after it sells the property.
If you want to avoid foreclosure or repossession, you may want to consider filing a Chapter 13 bankruptcy. A Chapter 13 bankruptcy can also help you with past due taxes, alimony, and child support by spreading the payments over a three to five-year repayment plan.
Do I Qualify to File a Chapter 7 Bankruptcy Case?
Chapter 7 bankruptcy is intended to help people who cannot afford to repay their debts. If you can afford to repay some of your debts, you must file under Chapter 13 to receive a bankruptcy discharge.
The bankruptcy Means Test calculates your current monthly income based on household income during the six months before you file your Chapter 7 bankruptcy petition. If your income is below the average household income for a family of your size in Pennsylvania, you “pass” the Means Test and should qualify for a bankruptcy discharge under Chapter 7.
If your income is above the median income for Pennsylvania, your “fail” the Means Test. However, if your disposable income is below a certain amount, you could still qualify to file Chapter 7 in Philadelphia.
Disposable income is the amount of money you have left over after subtracting allowable expenses from your monthly income. Allowable expenses include:
- Rent or mortgage payments
- Food and personal items
- Involuntary deductions from income (i.e., taxes, union dues, requirement retirement plans, etc.)
- Transportation costs
- Car loan payments
- Out-of-pocket health care expenses
- Childcare expenses
- Health, term life, or disability insurance premiums
- Court-ordered payments, such as alimony and child support
- Education expenses for a child
- Charitable contributions
There could be additional expenses you can deduct for special circumstances. Some expenses may be limited, such as the amounts for utilities, food, and clothing.
Our experienced Philadelphia bankruptcy lawyers carefully analyze the Means Test to ensure that every deduction is included and maximized to give you the best chance of qualifying for a Chapter 7 bankruptcy discharge.
Benefits of Filing Chapter 7 in Pennsylvania
The benefits of filing under Chapter 7 may vary depending on your financial situation. However, the pros of filing Chapter 7 can include:
Quick Way to Get Out of Debt
Most no-asset Chapter 7 cases filed in Pennsylvania are discharged and closed in four to six months after filing the Chapter 7 petition. You could be entirely out of debt in as little as a few months by filing Chapter 7.
No Repayment Plan
A Chapter 7 bankruptcy is not a repayment plan. You are not required to pay your unsecured creditors any more money for the debts you owe. If a debt is eligible for a discharge, the entire amount is eliminated in your Chapter 7 bankruptcy case.
Stop Creditor Harassment
When you file a Chapter 7 case, the bankruptcy automatic stay remains in effect until your case is discharged and closed. The automatic stay prohibits creditors from taking any actions to collect debts after you file your bankruptcy case. The bankruptcy discharge prevents creditors from trying to collect discharged debts after your bankruptcy case is closed.
Stop Lawsuits and Wage Garnishment
If a creditor has filed a debt collection lawsuit or is garnishing wages, the actions must cease when you file your Chapter 7 case. Provided the debt is dischargeable, the creditor cannot proceed with the lawsuit or the wage garnishment.
Keep Income and Property
Unlike a Chapter 13 case, you do not make monthly payments to a bankruptcy trustee. You keep the income you earn each month. A few people may lose property when they file under Chapter 7, but most people keep all their property unless they want to surrender their home or car to get rid of loan payments.
Avoid Deficiency Judgments
If a mortgage company forecloses on your mortgage, it can sell your home to pay off the debt. However, if it does not receive enough money to pay the loan in full, it can request a deficiency judgment. The lender can try to collect on the judgment. The same is true for a lender who repossesses a vehicle.
When you surrender your home or car in a Chapter 7 bankruptcy, the lender cannot obtain a deficiency judgment. Even if you owe the lender thousands of dollars after the property is sold, you cannot be held personally liable for the debt.
No Taxes Owed on Discharged Debts
A disadvantage of debt settlement is paying taxes on the debt the creditor forgives. For example, if a creditor agrees to write off an account if you pay one-half of the amount you owe, the creditor reports the forgiven debt to the IRS. When you file your tax returns, the forgiven debt is added to your income, which could result in owing taxes.
However, debts discharged in Chapter 7 are not included as income on your tax returns. You could discharge tens of thousands of dollars in unsecured debt without worrying about incurring tax debt.
Affordable Debt Relief
A Chapter 7 bankruptcy in Philadelphia is more affordable than you might believe. Most people are relieved to discover filing bankruptcy is not as expensive as they assumed. Our Philadelphia bankruptcy lawyers offer free consultations. It does not cost you anything to get bankruptcy advice.
Will I Lose My Property if I File a Chapter 7 Bankruptcy Case?
One of the most common concerns people express about filing Chapter 7 is losing their property.
Chapter 7 bankruptcy is a liquidation bankruptcy. A Chapter 7 trustee can take your assets and sell them to pay unsecured debts. However, the assets need to have equity above any liens and allowed exemptions.
Bankruptcy exemptions protect certain amounts of equity in specific assets. If a Chapter 7 trustee sells an asset, he must pay any secured debts first and then pay the debtor any allowed exemption before using the remaining funds to pay unsecured creditors. Therefore, if there is little to no equity in an asset, the Chapter 7 trustee would not likely be interested in selling the property because it would not benefit the unsecured creditors.
Most debtors keep all of their property when they file a Chapter 7 bankruptcy case.
In Pennsylvania, debts can choose between the federal bankruptcy exemptions and the Pennsylvania bankruptcy exemptions. You must be a Pennsylvania resident for at least 730 days before you file your Chapter 7 petition to choose the state bankruptcy exemptions.
Choosing the bankruptcy exemptions that are best for your case is crucial. For instance, Pennsylvania exemptions do not include a homestead exemption that can protect your home’s equity. Therefore, you might want to choose the federal bankruptcy exemptions if that is an issue.
Our bankruptcy lawyers in Philadelphia carefully analyze your property to determine which set of bankruptcy exemptions offer the best protection of assets in Chapter 7. We provide an honest assessment to help you decide whether you want to file Chapter 7.
It might be worth losing a piece of property to get rid of tens of thousands of dollars in unsecured debts in some cases. We can discuss the pros of Chapter 7 and other debt-relief options during your free consultation.
Is There Life After Filing Chapter 7 Bankruptcy – Rebuilding Credit
Another common concern of filing Chapter 7 is ruining your credit. A person’s credit rating has already been damaged by late payments, collections, judgments, and other negative information in many cases. Filing a Chapter 7 bankruptcy can help clear up some of these issues so you can begin working on improving your credit after bankruptcy.
The Chapter 7 bankruptcy filing remains on your credit report for ten years. However, it will not take you that long to qualify for a mortgage or car loan. By making all future debt payments on time and working to improve your credit score after bankruptcy, you will find that there is an opportunity for a healthy financial life after bankruptcy.
When you file Chapter 7, you are required to complete a Credit Counseling Course and Debtor Education Course. The courses can be completed online in less than two hours for a small fee. The information provided in these courses can help you improve your credit after bankruptcy. You can also find helpful information about rebuilding credit from the Federal Trade Commission.
Filing a Chapter 7 bankruptcy case is not the end of your financial life. For most individuals, filing a Chapter 7 bankruptcy case is the first step in improving their credit rating.
Contact Our Philadelphia Bankruptcy Lawyers for a Free Consultation
Do you have questions about filing Chapter 7 in Pennsylvania? If so, we encourage you to contact our office to schedule a free consultation with an experienced bankruptcy attorney in Philadelphia.
Our lawyers at Cibik & Cataldo, P.C. understand that you may not be sure if Chapter 7 is right for you. We will analyze your financial situation and give you an honest assessment of whether filing Chapter 7 could help you. We will also answer your questions about bankruptcy. You are under no obligation to hire our law firm after your initial consultation.