How Chapter 7 Bankruptcy Helps to Write-Off Debt

Is it More Effective Than Debt Settlement or Chapter 13 Bankruptcy?

May 13, 2009

Debt settlement and chapter 13 bankruptcy reorganizes debt. However, chapter 7 bankruptcy can write-off debt and clear credit card balances. No further payments required.

Consumers struggling with financial difficulties regularly turn to chapter 7 bankruptcy to write off debt. It works differently than debt settlement and chapter 13 bankruptcy which seek to reorganize personal debt and achieve affordability. It is aimed at helping consumers that have very little disposable income to offer creditors. Whilst regularly used to clear credit card balances, it is not suitable for all debts.

Chapter 7 Bankruptcy Eligibility Criteria

It is not possible to file for chapter 7 bankruptcy if that person has already done so in the previous 8 years. An assessment will be made of the debtor's income to determine whether they are able to contribute towards the arrangement. The court will compare a debtor's income against the median figure for that State to determine eligibility. Others may have non-exempt assets, such as a second home. Non-compliance may mean that chapter 13 bankruptcy or a debt settlement plan are more appropriate.

Write-Off Debt with Chapter 7 Bankruptcy

The most common reason for filing for chapter 7 bankruptcy is to clear credit card balances. According to the Nilson Report, US credit card debt stood at $972.73 billion at the end of 2008. It is not normally possible to write-off debt in relation to student loans, unpaid taxes, child support, alimony and court fees. Student loans may be possible if repayment would cause a family 'undue financial hardship.'

How Long Until a Debt Write-Off Takes Place?

A full debt write-off will take place after just three to five months under chapter 7 bankruptcy. Those debts that were never eligible from the outset, such as student loans, will remain. Should chapter 13 bankruptcy or debt settlement be chosen, it will generally take three to five years for that person to become debt-free. A creditor cannot charge any further interest and fees or pursue the debtor during or after bankruptcy.

Does Chapter 7 Bankruptcy Affect a Credit Score?

Credit scores will be negatively affected for up to 10 years with chapter 7 bankruptcy. This makes borrowing money for a new car or home more difficult. FICO scores may start to improve after a couple of years if timely repayments are made on other sources of credit, such as a mortgage or car loan.

It is important to carefully assess how serious financial difficulties are and consider whether chapter 13 bankruptcy or a debt settlement plan is more appropriate. Consumers that are eligible for chapter 7 bankruptcy will be able to write off debt, clear credit card balances and enjoy a completely fresh start.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

The copyright of the article How Chapter 7 Bankruptcy Helps to Write-Off Debt in Bankruptcy is owned by Asa Ghaffar. Permission to republish How Chapter 7 Bankruptcy Helps to Write-Off Debt in print or online must be granted by the author in writing.