Is Bankruptcy Really a Fresh Start?

August 11, 2022

Individuals who find themselves in financial turmoil may consider turning to bankruptcy for a fresh start. Bankruptcy can provide a lifeline to individuals who are strapped under mountains of debt, giving them a second chance to start anew from a financial perspective.

But, is bankruptcy really a fresh start? Let's take a look at some of the details of Chapter 7 and Chapter 13 bankruptcy as well as their long-term effects.

Are Bankruptcies Ever Denied?

Bankruptcies can get denied, as there are certain benchmarks that will determine whether you qualify for a bankruptcy under Chapter 7. While the rules differ from state to state, nearly all will require an individual to meet certain income levels, have a significant amount of debt and not own too many property assets.

The Census Bureau sets the general income benchmarks for Chapter 7 bankruptcy, though they aren't hardline limits. You may be able to still get a bankruptcy approved even if your income is above the general limits for where you live.

Finally, Chapter 7 bankruptcy often allows an individual to keep their homes, cars and certain assets. -- but only up to a certain amount. A bankruptcy court may determine an individual has to sell a property to cover their debts if the individual owns too much property.

How Much Do You Have to Be in Debt to File Chapter 7?

Bankruptcies are approved for a wide range of debt totals, but most fall within the range of $20,000 to $60,000. Some bankruptcies are also approved for amounts as low as a few thousand dollars.

The reason for this is that what is considered to be an "overwhelming" amount of debt is relative to each individual's situation. Having $5,000 in debt may be a lot to a single parent who earns $30,000 per year, but it might not be as impactful to a married couple earning $300,000 in annual household income.

There is no debt requirement to file for bankruptcy. The bankruptcy court in your state will simply determine whether you make too much or have too much disposable income. If not, they will likely approve your bankruptcy case.

Does Chapter 7 Discharge all Debts?

Chapter 7 bankruptcy will discharge most, but not all, of an individual's debts. An individual does not have to surrender all of their cash and assets. Chapter 7 bankruptcy is designed to give individuals a fresh start financially, without forcing them to lose everything they own.

Can I Spend Money after Filing Chapter 7?

People who file for Chapter 7 bankruptcy will be held under a microscope following their case. In fact, bankruptcy court will not only analyze an individual's spending before a case but for up to 90 days after the case closes.

Any spending that would be considered frivolous or extravagant in the court's eyes might be determined to be fraudulent. So, if you file Chapter 7 bankruptcy, make sure that you are on the straight and narrow after your cases closes.

What to Avoid Immediately After Filing for Bankruptcy

After you file for bankruptcy, you need to keep your spending in check. You can't spend money on frivolous things and claim at the same time that you can't afford your normal monthly debt obligations. 

It is also important to note that bankruptcies will not discharge most tax debts. Although some income tax debts will be discharged, certain conditions must be met in order for these debts to qualify for discharge. Finally, secured debts such as a mortgage or auto loan must continue to be paid or the collateral must be surrendered.

Is It Better to File a Chapter 7 or 13?

Most individuals will choose Chapter 7 bankruptcy for a number of reasons. Not only is the Chapter 7 process quicker, but it allows individuals to not have to repay their debts while also keeping some assets such as their homes.

Chapter 13, meanwhile, requires individuals to repay at least a portion of their debts. Over a three- to five-year period, people who choose Chapter 13 bankruptcy will need to pay the entirety of their disposable income to their creditors.

However, Chapter 13 might be preferable -- or the only option -- to some people. For example, wealthy individuals may not qualify for Chapter 7. For others, Chapter 7 won't provide enough relief from all of their debts.

How Fast Can I Raise My Credit Score after Chapter 7?

One of the biggest myths of Chapter 7 bankruptcy is that your credit score will be ruined for seven years. That's simply not true. In most cases, you can you can begin to raise your credit score as soon as 12 months after your bankruptcy is finalized.

What is the Average Credit Score after Chapter 7?

Chapter 7 bankruptcy will affect an individual's credit score differently depending on what your original credit score was before the bankruptcy. For example, if your credit was considered good, very good or excellent before the bankruptcy -- with a score 670 or above, you will likely experience a 200-point drop in your credit score after your bankruptcy.

If you have a fair or poor credit score before the bankruptcy -- with a score of 669 or below -- you'll likely experience a drop in credit score between 130 and 150 points. 

What are the Cons of Filing Chapter 7?

Some of the cons of filing Chapter 7 are that there's an income limit for who qualifies, it negatively affects your credit score and will remain on your credit report for a while, it doesn't discharge all of your debts, it may force you to liquidate some assets, and it could create unwanted publicity. 

Will Bankruptcy Help Me Start Over?    

Bankruptcy can help some individuals start over. No matter what type of bankruptcy you file, it will help you get out from under a mountain of debt, sometimes with more pros than cons. 

Of course, how you fare financially after a bankruptcy depends on how you change your spending habits and overall financial situation going forward.

How Many Years is Bankruptcy on Your Record?    

Chapter 7 bankruptcies can remain on your record for as much as 10 years after you file for bankruptcy. Chapter 13 bankruptcy falls off your record after seven years. You don't have to do anything to get it removed from your credit report; it will fall off automatically.

How Much Will My Credit Score Go up after Bankruptcy Falls Off?

Your credit score can increase by as much as 100 points when a bankruptcy falls off your record. How much your credit score will increase exactly will depend on a number of different factors, including how well you've done to build up your credit score from the time you originally filed for bankruptcy.

What are Some Alternatives to Bankruptcy?

Bankruptcy should be viewed as a last resort for many people. If you find yourself in a lot of debt, you could opt for debt settlement if your creditors offer it and/or credit counseling through an independent agency.

To pay off your debts, you could try to sell some assets, consolidate your debt, refinance your mortgage or borrow money from people you know. Ultimately, no matter what alternative to bankruptcy you choose, you should work to lower your expenses by making lifestyle and budgetary changes.

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