If you're deep in debt, Chapter 7 may help - learn the pros and cons
If you live in Raleigh or anywhere in North Carolina and are deep in debt, you may be wondering whether bankruptcy can help you get out of debt. We wrote earlier this week about the pros and cons of Chapter 13 and how it can help those that have high equity in a home but need to catch up on payments or who earn too much to qualify for a Chapter 7. Today we look at Chapter 7 – this is the type of bankruptcy that will discharge most of your unsecured debts and can get your balance cleared for a mortgage or car loan that you want to abandon if you owe too much.
Here are the pros and cons of this type of bankruptcy:
Con – Your credit score will drop once you file Chapter 7 bankruptcy. FICO released information about how far your score will fall after filing. Those with higher credit scores – in the excellent range of 700 and up – can lose 240 points. Those with lower scores will see a comparatively smaller dip.
Pro – If you are behind on your bills and can't pay them, your credit score is taking a hit every month that you are late or miss a payment. Every account that goes into collections or lawsuit filed against you will drop it, as well. Filing will at least stop these and allow you to start rebuilding your credit.
Con – You will have to give up all of your credit cards, including store charge cards and major credit cards. Your debit card attached to your bank account should not be affected as it is not a “credit” card. Even if you try and hide one from the court, the issuer will cancel it once they know you've filed.
Pro – Your credit cards are likely a source of your financial stress in part. Most of our clients that come in have maxed out their cards and are being hit with huge interest payments each month and, if they can afford to pay, can only pay the minimums. Getting clear of this debt will be a huge relief.
Con – You won't be able to qualify for a mortgage for awhile after you file for Chapter bankruptcy. To get an FHA mortgage, you will have to wait at least two years before you can be approved. For other types of mortgages, it will take longer.
Pro – If you want to buy a home, filing a Chapter 7 can get you clear of other debts so that when you do get a mortgage, you won't be weighed down by other debts. And the waiting period between when you file bankruptcy and apply for a mortgage will allow you time to save up a down payment.
Con – Not all of your debts will be canceled. Child support and alimony cannot be canceled. Student loans cannot be canceled unless you file an extra document called an adversary proceeding. If you are current on your mortgage, you can keep your home, but that debt will also not be canceled.
Pro - Credit cards, medical bills, outstanding loan balances on a car or home that have been repossessed, most furniture loans and other debts will be discharged. Certain back taxes may be eligible for discharge, as well. And you can try to get your student loans discharged – it's worth a shot.
If you owe a ton of unsecured debt, such as credit cards and medical bills, Chapter 7 may be a viable solution to get you a financial fresh start and peace of mind when you're free from overwhelming debt. Contact the law offices of John T Orcutt for a free consultation at our Raleigh location or any of our other convenient locations.