The Risks of Filing Chapter 7 Bankruptcy.

While filing a Chapter 7 bankruptcy is usually a very good fit, there are certain risks that every debtor should take under consideration.  Here are a few:

  1.    Creditors have the option of contesting the discharge of  debt.  For example, if fraud or a misrepresentation was used to induce credit or a loan, the creditor can object to the discharge of that debt.
  2.  In some cases, the debt will be discharged but the security  or lien survives the bankruptcy discharge.  A good example of this would be taxes that are discharged.  The IRS’s tax lien will survive the bankruptcy and continue to attach to the property that was in the bankruptcy estate.
  3. Debtors may underestimate the value of their property.  If the bankruptcy trustee disagrees with the valuation, and the debtor does not have sufficient exemptions to protect the higher valuation, the debtor will likely lose some assets.  This can be a significant risk where the debtor has a home and the local real estate market is hot.

However, the vast majority of cases do not present these kind of issues, so filing the case makes a lot of sense.  But it never hurts to review the risks before filing.