5 Reasons People File Chapter 7 Bankruptcy

The previous peak in the amount of debt carried by Americans was $12.68 trillion in 2008 just as the Great Recession was getting underway. In the third quarter of 2019 that figure reached a new all-time high of $13.95 trillion as reported by the Federal Reserve Bank of New York. People in the age range of 35-54 carry an average debt load of around $134,000. But what’s “too much” debt varies from person to person according to their unique situation. People considering whether or not they should file for bankruptcy should understand the 5 most common reasons people file Chapter 7 bankruptcy.

Differences Between Chapter 7 and Chapter 13 Bankruptcy

Chapter 7 bankruptcy is different from Chapter 13 bankruptcy. In a Chapter 13 filing, there is a payment plan over the course of 3-5 years to pay back some or all of the person’s debts, with a portion of some of those debts being eliminated when the bankruptcy is discharged.

Chapter 7 bankruptcy does not include a payment plan, which is why it sometimes also called a “straight bankruptcy” and is often done much faster, typically within several months. However, it does involve liquidating any significant assets or property you own in order to pay back as much of your debts as possible, which is why it also referred to as a “liquidation bankruptcy.” People who don’t have such assets or property don’t have to worry about that. A Chapter 7 can also usually be worked out in a way so you get to keep certain kinds of property, such as your house and your car. For those who do have significant property and assets they want to hang onto, Chapter 13 might be the better option. If you add up all the debt payments you’re supposed to be making and the total is more than your monthly income, Chapter 7 could be the right choice to find relief.

Many people carry multiple kinds of debt: Mortgage debt on a home, student loans, car loans, and credit card debt are all common. But all sorts of things can happen that suddenly make your debt situation unmanageable. Here are 5 reasons people file Chapter 7 bankruptcy:

Reason 1: Debt Litigation

Some people struggle for a long time with their debts, just barely keeping up for years. As it turns out, the most common thing that triggers them to file for Chapter 7 bankruptcy is when they get sued by a debt collector. When debtors find themselves the object of a lawsuit, it can be the “final straw” that makes them file bankruptcy.

Reason 2: Sudden Loss of Income

Another common event that can serve as a trigger for filing Chapter 7 bankruptcy, especially for those who already struggling to keep up with debt payments, is a sudden loss of income because of a change in employment. Unemployment, even if only temporarily, can be enough to make bankruptcy a necessary option.

Reason 3: Unexpected Medical Bills

When an unexpected illness or accident sends a person to the hospital, the result can be large amounts of medical debt – even for those who have health insurance. If large medical bills are the stressor leading people to file bankruptcy, the good news is that they are considered unsecured debt. In a Chapter 7 bankruptcy filing, this means the debt will be fully discharged to wipe the slate clean.

Reason 4: Excessive Credit Card Debt

When consumers find themselves saddled with an excessive amount of credit card debt, they can reach a point where it’s no longer manageable, even when making just the minimum required payments. In these cases, a Chapter 7 bankruptcy can often provide full relief because it is all unsecured debt.

Reason 5: Separation and/or Divorce

Another common trigger for filing a Chapter 7 bankruptcy is separation and/or divorce. While a person’s income might not change, expenses are going to go up sharply for both parties because now each person has to maintain their own housing and utilities, and one party may also have to pay either alimony or child support or both. For those already struggling with debt, separation and/or divorce can make their current debt load unmanageable.

If you’re struggling with too much debt but are unsure whether or not filing for bankruptcy is the right decision, Callahan Law in Kansas City can help! We offer a free consultation where we will go over your options and assist you in deciding whether or not to file, as well as which type of bankruptcy would be best for your situation – Chapter 7 or Chapter 13.

Contact UsBankruptcy laws exist in order to provide people with a way out from under crushing loads of debt. Everyone deserves a fresh start when they need it most, and filing for bankruptcy gives people a way to make that fresh start when too much debt is holding you back. Give us a call at 816-822-4041 or fill out the form on our website to schedule your free consultation. Your fresh start might be just around the corner!