Chapter 7 is sometimes referred to as straight bankruptcy or liquidation. This is because, depending on your specific situation, a Chapter 7 discharges or “wipes out” all of your unsecured debt in exchange for a liquidation of all of your non-exempt property. What is non-exempt property and whether a debt is secured or unsecured can be confusing and should be discussed in-depth personally with your attorney. Most people who file a Chapter 7 bankruptcy do not have non-exempt property to liquidate. Chapter 7 is a useful tool for consumers or corporations seeking to get a fresh start from unsecured debt.
Specifically, Chapter 7 is effective in dealing with
- credit card debt
- creditor harassment
- collection activity
- medical bills
- payday loans
- deficiencies from repossessions or foreclosures
- Business debt or business closure
- Co-Signer debt liability
- IRS liability
THE AUTOMATIC STAY
Bankruptcy laws were created as a way for those people who have become overburdened by debt to get out from under and have a chance to start anew. One of the main advantages of filing bankruptcy is that under either a Chapter 7 or Chapter 13 bankruptcy, an automatic stay is placed on all debts once the case has been filed. This means creditors cannot seek payment during the process, must stop all collection activity, including lawsuits and may not even contact the debtor. Once the case is successfully completed, all dischargeable debts are discharged forever.
SECURED V. UNSECURED DEBT
Generally speaking, a debt is secured if it was incurred to buy specific collateral that the creditor retains an interest in and can repossess or foreclose. Examples of secured debt include your house, vehicle, furniture and appliances. These debts are often reorganized in a Chapter 13 if you are behind on the payments. The secured merchandise may often be kept in a Chapter 7 bankruptcy, if payments are kept current. However, you may also be able to surrender secured collateral and discharge any potential deficiency if this is in your best interest. This can be beneficial and is something that must be discussed with your lawyer.
Chapter 7 discharges your debts that are not secured. Examples of unsecured debt include most credit card debt, personal loans, judgments and medical bills. Chapter 7 allows you to discharge your unsecured debts and keep all of your exempt assets such as houses, cars and retirement accounts. Chapter 7 affords you the opportunity to make a clean start without the burden of bills.
EXEMPT V. NONEXEMPT PROPERTY
The federal bankruptcy code requires that debtors qualify for Chapter 7 bankruptcy. A debtor with non-exempt assets or tax issues may find it beneficial to file a Chapter 13 bankruptcy, but this should be discussed with a bankruptcy professional.
In Texas Chapter 7 filers are allowed the option of choosing the federal exemptions or the state’s exemptions. Exemptions are property and assets that may be protected from seizure to pay creditors. The Texas exemptions include your homestead up to 10 acres of property (in town) or 100 (rural), $50,000 in personal property (cars, home furnishings, etc.) and retirement plans, among others. The exemptions are increased for married couples filing jointly. Federal exemptions are also available for Texas residents who file bankruptcy. Choosing the appropriate exemptions is a critical part of the bankruptcy process so it is advisable to contact an experienced bankruptcy attorney to aid you. There are exceptions to the exemptions. If property is not exempt, the Trustee may “liquidate” the property to pay your creditors. This is rare in most Chapter 7 filings, but again, it is advisable to seek legal counsel regarding your exemption rights. Chapter 7 does not typically eliminate liens such as mortgages, some other debts including student loans, alimony and child support, or some types of tax debt.
Those considering a Chapter 7 filing must qualify through a “means test” to determine if they have the means to pay their creditors. Anyone filing Chapter 7 must either fall below the state’s median income for families or qualify under the “means test.” In Texas, that median income currently ranges from $41,960 for a single person to $69,570 for a family of four. The income is calculated from the six months of income earned immediately before filing. Anyone above the median income may still be able to file a Chapter 7, but must qualify under strict guidelines based on IRS standards. This is one of the many reasons to seek guidance from an experienced attorney who can guide you through the process. One of the reasons Chapter 7 is a good tool in dealing with business debt is that if a filer has more than 50% non-consumer (“business”) he or she does not need to qualify under the “means test”. Even if a debtor does not qualify for a Chapter 7, he or she may still file Chapter 13, which establishes a debt payment program based on income, expenses and assets. Some debtors who qualify for a Chapter 7 may find it beneficial to file a Chapter 13 anyway for various reasons. This is something which should be discussed with your lawyer.
In addition to qualifying under the means test, the bankruptcy code requires Chapter 7 filers to attend a court-certified credit counseling class prior to filing and a personal finance management class after filing. They must file a Statement of Financial Affairs listing their assets, debts, and names and addresses of all creditors. There are many documents and schedules which are required to be filed timely. In addition, the individual must attend one court hearing, unless there are complications. An experienced bankruptcy attorney will be able to help you meet all the filing requirements and guide you through the entire bankruptcy process to insure you receive your fresh start in the most simple, painless and efficient manner.
If you or your business in Texas needs the assistance of an experienced Houston Bankruptcy Attorney, call The Fealy Law Firm, P.C. today at 866-751-1087, or complete the contact form provided on this site to schedule your free consultation