Personal Finance

Can I Spend Money After Filing Chapter 7

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 4 minute read

Sometimes, bankruptcy is the greatest option when it comes to your financial situation. It’s possible that you’ve gotten in over your head financially and feel that there’s no way out. When you declare bankruptcy, you may start over financially and have a fresh start.

There are a few various ways to declare bankruptcy, and choosing the right one for you will depend on your unique circumstances. People with high debts and low incomes are the target audience for Chapter 7 bankruptcy. Chapter 7 bankruptcy may be a good choice if you know you will never be able to pay off your debts.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is the most common type of bankruptcy. When filing for Chapter 7 bankruptcy, nonexempt assets including a second vehicle, a second house, and priceless family heirlooms are sold to repay creditors.

The bankruptcy court will also sell any investments or savings you may have in addition to liquidating these assets. Your debts will be paid off with the money you make from these endeavors. Your remaining obligations will be dismissed or released if the worth of your assets is insufficient to cover them all. In other words, you don’t have to pay it anymore because it’s been canceled.

It’s possible to get almost instant financial relief if you file for Chapter 7 bankruptcy, as doing so triggers an automatic hold on all of your outstanding bills. Once the stay is in effect, your creditors are prohibited from taking any further legal action against you, including wage garnishment and property repossession.

Assuming a smooth procedure, Chapter 7 bankruptcy can be finalized in as little as six months.

Bankruptcy under Chapter 7 vs. Bankruptcy under Chapter 13

There are further bankruptcy chapters besides Chapter 7. Chapter 13 bankruptcy is an option for individuals as well. One may be a better choice for you while the other may be preferable for someone else due to the distinctions between the two.

Payment Plan

A repayment plan is established between you and your creditors during Chapter 13 bankruptcy. The strategy usually takes a few years to completely settle your debts. There are a few names for bankruptcy under Chapter 13: reconstruction bankruptcy and wage earner bankruptcy.

There is no repayment schedule in Chapter 7. After all of your assets have been sold and your debts have been paid in full or in part, the process will be complete. If you cannot liquidate enough nonexempt assets, you may still be able to satisfy your unsecured debts.

Minimum Earnings

The income criterion is another key distinction between Chapter 7 and Chapter 13. A successful means test is required for Chapter 7 bankruptcy. You either make less than the state median income or have so many other outgoings that you can’t afford to pay back your loans.

What Happens to Your Property?

If you file for Chapter 13 bankruptcy, you get to keep most of your possessions. As long as you can keep up with the payments on your major pieces of debt, you will be allowed to keep your home and drive a car. Chapter 13 bankruptcy requires court approval before any asset sales may be made.

If you qualify for Chapter 7 bankruptcy, you can keep your house and car, but you must sell a number of other assets.

Bankruptcy under Chapter 7 vs. Bankruptcy under Chapter 11

For those who don’t qualify for Chapter 13, Chapter 11 is another way out of debt. It is similar to Chapter 13 in that you can restructure your debts and negotiate a payment plan with your creditors. Although Chapter 11 is typically used by corporations, individuals also have the choice to use it. If your debts are too large for Chapter 13 bankruptcy and you don’t have a reliable source of income, Chapter 11 may be your best option.

Chapter 7 bankruptcy is available to companies as well, but Chapter 13 is not. When a company files for Chapter 11, it does so with the intention of continuing operations during and after the bankruptcy. In Chapter 7, on the other hand, the company’s assets are liquidated and it goes out of business.

Should You File for Bankruptcy Under Chapter 7?

Not everyone should file for Chapter 7 bankruptcy. You should do all in your power to avoid filing for bankruptcy in the first place. However, if you’re genuinely in over your head with debt and have tried everything else, Chapter 7 bankruptcy can be a lifesaver. There are times when declaring bankruptcy is the best choice.

  • Not everyone should file for Chapter 7 bankruptcy. You should do all in your power to avoid filing for bankruptcy in the first place. However, if you’re genuinely in over your head with debt and have tried everything else, Chapter 7 bankruptcy can be a lifesaver.
  • There are times when declaring bankruptcy is the best choice.

Bottom Line

The benefits of Chapter 7 bankruptcy in terms of eliminating debt are not without some negatives. If you file for bankruptcy, it will remain on your credit record for 10 years, which might significantly lower your score. Credit scores that take a blow might make it tough to apply for new lines of credit in the near future.

Keep in mind that just because you file for Chapter 7 bankruptcy doesn’t mean that all of your debts will be erased or that you’ll suddenly be debt-free.

Chapter 7 bankruptcy, on the other hand, can be a lifeline for those who are drowning in debt and unable to pay for basic necessities. Discussing your financial situation with a lawyer and a credit counselor at a non-profit organization might help you understand your alternatives if you’re thinking about filing for bankruptcy.

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