Chapter 7 bankruptcy can provide an enormous amount of relief to debtors in exchange for minimal consequences. The huge upside, often combined with very little low side, can cause those seeking debt relief to question if Chapter 7 bankruptcy is fools gold. When providing consults to those in need of debt relief, I occasionally find feeling like a snake oil salesman when I hear the cynical cliché: “sounds too good to be true”.
The truth, though, in most cases is that it does sound too good to be true. In a majority of my cases, a debtor can get rid of all or most of their debts, better their credit score, and keep all of their assets. Negative consequences are typically limited to the bankruptcy showing up on their credit report for 10 years, and the inability to finance a home for two years after discharge.
Even the negative consequences are usually moot; who cares about the bankruptcy on their credit report if their score goes way up? If you already own a home, who cares if you can’t buy one for two years? And if you’re renting – chances are you wouldn’t qualify for a home loan anyways because of terrible credit. Further, Bankruptcy can actually put you on faster path towards home ownership because it cleans up your credit.
Chapter 7 bankruptcy is referred to in the Bankruptcy Code as “a fresh start”. Congress intended it to be too good to be true. Those in our society who struggle with debt do not deserve to spend their lives in some abstract debtor’s prison, constantly being harassed and sued by creditors that they could not ever pay.
Congress’ intention was to give Americans a way out of debt, but to also treat creditors fairly. If you do have non-exempt property (planes, boats, rare coin collections), it is fair to turn that over to the creditors in exchange for discharging your debts. But most people do not have non-exempt property, so they are not faced with the consequence of giving up property. If your income shows that you have an ability to repay creditors, you will likely have to file a Chapter 13 bankruptcy and pay back your creditors over time. But if you do not have the income to support yourself and your family AND pay back creditors, Chapter 7 is your way out of debt.
Chapter 7 bankruptcy can be very beneficial financially (and for your sanity if you’re being harassed by creditors). If you think that Chapter 7 bankruptcy sounds too good to be true, you may be right. But that is the point of Chapter 7 bankruptcy, and that was Congress’ point when writing the Bankruptcy Code. It is a way out of debt for struggling Americans – and in the end, society is stronger and better economically when our population isn’t burdened by unpayable debt.