Chapter 7 bankruptcy: separating myth from fact

When many people are in debt, they have heard about the great things that Chapter 7 can do to help them out of their problems. However, some people do not seek the help that Chapter 7 offers, because they have also heard some unpleasant things about the process. If you are among the many people in Washington State that are in dire financial circumstances, you should not let what you may have heard discourage you from seeking the help you need.

Your property will be lost

The most common misunderstanding about Chapter 7 is that filing it will cause you to lose all of your property. Although Chapter 7 may involve a liquidation sale, most people truly in financial peril do not lose anything during the process. The reason for this is that most important assets such as a car, clothing, retirement accounts, home equity and most personal items are usually exempt by federal or state law from being sold during the Chapter 7 process. In general, the only filers that experience the liquidation sale are those with multiple homes and luxury items, or are behind in payment on secured debts (like cars or homes), which is not the majority of bankruptcy filers. As a result, most complete bankruptcy with the same property that they owned before they filed.

Bankruptcy is difficult to qualify for

Several years ago, Congress modified the Chapter 7 bankruptcy laws to require filers to pass a means test before they may obtain relief. Since that time, Chapter 7 has developed an unjustified reputation among the uninformed as being difficult to qualify for. However, in reality, most filers pass the means test without any problems.

The means test involves an examination of your income. If you have income that is below the median for similar households of your size in Washington, you automatically qualify for Chapter 7 relief. Even if your income is above the median, you may still qualify. In such cases, the court will look at your disposable income-the income left over after taxes and necessities has been deducted. If your disposable income is below a certain amount, you qualify for Chapter 7. In cases where you fail to pass the means test, you have the option of filing Chapter 13 bankruptcy, which can help you reorganize and eliminate certain debts.

Filing Chapter 7 will cause credit problems

Many people hesitate filing Chapter 7 because they have heard it will forever ruin their credit. This is not correct, and in my opinion, credit is too easily obtained after filing bankruptcy. Although filing bankruptcy will cause your credit score to drop, its negative effect is only temporary. Many people find that they can qualify for credit cards, mortgages and car loans weeks or months after finishing bankruptcy. If you continue to demonstrate financial responsibility, you can rebuild your credit score to respectable levels in as little as a year or two. You may qualify for a home loan in only two or three years.

Don't rush in! Get advice first

Although Chapter 7 bankruptcy may seem like an attractive option to deal with your debts, it may or may not be the best way to solve your financial problems. An experienced bankruptcy attorney can review your financial status and recommend the best way of getting out from under your burdensome debt load.