A Chapter 7 bankruptcy can quickly discharge debts, but requires liquidation of many personal assets to pay creditors. This differs from a Chapter 13 bankruptcy, which allows you to keep more assets but creates a long-term payment plan to pay part of your debts. If you are filing for a Chapter 7 bankruptcy, keep in mind that your spending after the bankruptcy will be heavily affected, even if your debts are discharged.
Chapter 7 is not chapter 13, and it does not offer a repayment plan that you have to follow for years. This means that you do not have required monthly payments you must make to the bankruptcy estate. You can walk away from all debts you incurred before the date you filed. This frees more income that you have available for spending, and the chapter 7 bankruptcy will not tell you how to spend that money. Keep in mind that any debts you occur after filing, even if your debts have not yet been discharged, will not be forgiven.
While the court will not require any spending plan from you, it will require something similar—a meeting with a credit adviser prior to the bankruptcy. This adviser will help you form a spending plan to stay out of debt after the bankruptcy and keep control of your finances in general. Often, advisers will suggest you stop using credit cards and create a stricter budget for your monthly expenses. You should follow this plan, because you cannot file for bankruptcy again until eight years after your debt has been discharged.
There are some payments that the court will not discharge. These requirements may limit your spending ability, too. For instance, any court-mandated payments must be continued, so if you have child support, alimony or taxes you have not paid, you will need to pay them back, too. Student loans and other loans connected to the government fall under the same umbrella.
A Chapter 7 bankruptcy will limit your spending in another significant way—through loans. Do not expect to gain any more credit for spending after your bankruptcy. Due to federal regulations, a Chapter 7 bankruptcy stays on your credit report for 10 years and can drop your credit score by more than 250 points, in addition to credit issues with defaulting on your loans. You will probably have to wait at least two years before applying for a large loan again.
- FTC: Knee Deep in Debt
- Mortgagefit: Chapter 7 Bankruptcy filing and exemptions
- U.S. Courts. "Discharge in Bankruptcy - Bankruptcy Basics." Accessed May 20, 2020.
- Federal Student Aid. "In some cases, you can have your federal student loan discharged after declaring bankruptcy." Accessed May 20, 2020.
- IRS. "Additional Information on Payment Plans." Accessed May 20, 2020.
Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.