If you have ever considered filing Chapter 7 bankruptcy, it is a good idea to understand exactly what that means, and how the process works. In this post, Daic Law offers an overview of Chapter 7 bankruptcy, including some pros and cons to filing. As always, if you have questions, do not hesitate to contact us directly.
Overview of Chapter 7 Bankruptcy
Who are Debtors and Creditors?
A “debtor” is an individual or entity that owes money another person or entity, or the “creditor”/”lender,” a sum of money. For individuals, the Chapter 7 bankruptcy process can release debtors from the legal liability of repaying certain types of debts. This kind of bankruptcy functions as a “reset” for individuals who are overwhelmed by their debt to the extent that they cannot pay their bills.
Who Can File for Chapter 7 Bankruptcy?
A debtor is not eligible to use Chapter 7 bankruptcy if the debtor previously received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy filed). A debtor must pass the “Means Test” in order to file for Chapter 7 bankruptcy. The Means Test weighs a debtor’s financial records, including income, expenses, secured and unsecured debt. The debtor must qualify under income limits. There are also debt requirements.
Are There Pros and Cons of Filing Chapter 7 Bankruptcy?
Pros: A debtor can prevent lenders from collecting or repossessing the debtor’s property. Although the debtor is in bankruptcy, it is possible to keep essential property like residential property and motor vehicles. After the debtor files, the debtor will be able to keep any salary earned and any property purchased. An individual in default (meaning an individual who owes money to lenders) with several lenders that did not file for bankruptcy does not get these benefits.
Cons: A debtor’s credit can be severely damaged, and they will lose their credit cards. Luxury items will likely be sold to satisfy debts. Additionally, obligations such as student loan, child support, and alimony payments will remain even after the Chapter 7 bankruptcy process.
What is the Chapter 7 Bankruptcy Process?
The Automatic Stay
After a debtor files for Chapter 7 bankruptcy, the court issues an automatic, temporary stay on current debts. This stay acts as a shield from creditors collecting on debts by repossessing property, garnishing wages, foreclosing on a home, or evicting an individual from a rental property. The debtor’s property then shifts to the court’s possession. The court will appoint a bankruptcy trustee to the debtor’s case.
Who is The Bankruptcy Trustee?
The court will take legal possession of the debtor’s property and appoint a bankruptcy trustee to the debtor’s case. The trustee does not represent the debtor. The trustee’s primary duty is to see that the creditors are paid as much as possible of what they are owed by the debtor. The more assets the trustee recovers for creditors, the more the trustee is paid.
What Does The Trustee Do?
The bankruptcy trustee (“trustee”) reviews the debtor’s finances and sells certain property that is not exempt from being sold to satisfy remaining debts with creditors (exemptions explained below). A trustee also conducts a meeting between the debtor and their creditors where the debtor answers questions about the bankruptcy filing, also known as a “creditor meeting.” In most Chapter 7 bankruptcy cases, an individual debtor does not own a large amount of assets that are valuable enough for the trustee to sell.
Property Exemptions: What Can the Debtor Keep?
The law provides for a list of property that debtors don’t have to sell or turn over to creditors (exempt property), and the total value that a debtor can exempt varies by state. In Texas, a debtor can elector to use either federal exemptions or Texas exemptions. It is important to select the exemptions that will best protect the debtor’s property. A debtor cannot mix and match exemptions from the federal exemptions and Texas exemptions, one must be selected.
Texas bankruptcy exemptions typically best protect an individual debtors property from being sold by the trustee than the federal exemptions. The law has exemptions for a debtor’s residential property (referred to as a homestead exemption), motor vehicles, and personal property. Texas exemptions may also allow for the exemption of pensions/retirement accounts, However, a debtor should utilize the federal exemptions, like the federal wildcard exemption, when assets are not exempt under Texas rules. For example, lawsuit proceeds are not exempt under Texas exemptions.
What Comes After the Chapter 7 Bankruptcy Process?
When the Chapter 7 bankruptcy process comes to a close, the court will “discharge” the debtor’s debts. This process lasts about four to six months from the initial bankruptcy filing. This means that the court will essentially dismiss or forgive the debts and they are no longer owed. Some debts cannot be discharged, such as student loans or child support.
Have Questions about Filing Bankruptcy?
If you are struggling to manage your debts, bankruptcy may be a good option to consider. Before deciding, it is best to speak with a consumer and debt defense lawyer to make sure you are aware of your legal rights and responsibilities, as well as your options for financial relief. At Daic Law, we offer individuals and small businesses assistance with debt defense, debt collection lawsuits, and bankruptcy. Contact us to learn more about how we can help you. Call us at 877-893-6040, or email us at info@daiclaw.com. Daic Law’s office is located in Houston, but we serve clients in the great Dallas, Austin, and San Antonio areas, and many other locations across Texas.