Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a total liquidation of the bankruptcy estate. In this type of bankruptcy, the Chapter 7 Trustee will gather up all non-exempt property owned by the debtor to pay the creditors that file a valid and timely proof of claim. The debtor is entitled to keep all exempt property. There are certain types of debt that cannot be discharged in bankruptcy, but for the most part, credit card debt, personal loans, and unsecured bills are discharged in a Chapter 7.
You may keep such exempt assets like your home or your car, however if either is subject to a lien, it is likely you will have to keep paying this debt to avoid repossession or foreclosure. Though a creditor cannot foreclose or repossess any property in an active bankruptcy, a creditor may ask the bankruptcy court to lift the automatic stay so that a repossession or foreclosure can continue. Alternatively, the debtor can reaffirm the debt (in a Reaffirmation Agreement) secured by the debtor’s home or car under either the same terms or newly negotiated terms.
In order to file a chapter 7 bankruptcy, a debtor cannot have been dismissed from bankruptcy in the previous 180 days; and must either (1) have an income less than the median income of a household of your size in the state of Texas; or (2) must not have disposable income—income that can be used to pay unsecured creditors—in excess of $12,475 as it is calculated under the Means Test.
A Chapter 7 bankruptcy takes approximately 3 to 6 months on average to complete and receive a discharge. A Chapter 7 remains on your credit report for up to 10 years, and will affect your access to credit for that time.
Chapter 13 Bankruptcy
A Chapter 13 is a reorganization of a debtor’s finances that allows them to pay back their creditors over a 3-5 year period based on their income and the size of their family. A debtor files for a Chapter 13 bankruptcy if the debtor has a regular source of income and has not filed a prior bankruptcy in the past 180 days. This type of bankruptcy allows a debtor to propose a plan to repay creditors back payments and restructure debt.
The debtor proposes a Chapter 13 plan to repay debts with disposable income over a three- to five-year period. The Chapter 13 Trustee must review and ensure the plan conforms with the law. Provided no one objects to the plan, it is then confirmed by the bankruptcy court. The Trustee then disburses the funds under the plan to creditors, and monitors the debtor complies with all requirements of the bankruptcy.
The debtor is entitled to keep exempt property, just as you can in a Chapter 7 bankruptcy. However, any property subject to a lien (like a mortgage or a car loan) will have to be paid either directly to the creditor under the original loan terms or thru the Chapter 13 plan, where the debtor can adjust monthly payments, pay back delinquent payments, and sometimes adjust the interest rates and other loan terms.
Provided the debtor makes all plan payments, remains current on taxes, alimony, and child support payments, and there are no objections to a discharge, then the debtor will be discharged from the Chapter 13 bankruptcy at the end of the plan. The remaining unsecured debt at the end of the plan is discharged, and payments to secured creditors shall continue according to the plan terms.
Do you charge a consultation fee?
No, I usually meet and discuss with a client for the first hour for free.
Do I need an attorney to deal with creditors or a bankruptcy?
The short answer is no, however, dealing with a bankruptcy and/or collections is a very complex legal process. You should be represented by a qualified attorney.
How long will bankruptcy be on my credit report?
A Chapter 13 is deleted from your credit report 7 years after the filing date, a Chapter 7 is deleted from your credit report 10 years after the filing date.
What happens to credit card debt and other unsecured debt in bankruptcy?
Upon a discharge in a Chapter 7, credit card debt and other unsecured debt is discharged and is no longer owed by the debtor. It is usually reported on the creditor report as being discharged in a Chapter 7 bankruptcy.
A Chapter 13 requires a debtor to pay all disposable income into the Chapter 13 Plan. Your unsecured creditors are entitled to receive at least the same under a Chapter 13 as the creditors would receive under a Chapter 7, therefore at a minimum you must pay your unsecured creditors your non-exempt property. The amount unsecured creditors receive can vary, but often is minimal unless a debtor has a lot of non-exempt property.
What property is exempt?
Various property, personal property, and certain pension and retirement accounts are exempt from bankruptcy proceedings. There are conditions that have to be met but the following are typically exempt:
- Personal property (home furnishings, tools, clothing, etc.)
- Pensions and retirement accounts
- Insurance benefits
- Unpaid wages
What happens to secured debts in bankruptcy?
In a Chapter 7, the debt is typically discharged, but the lien on any collateral—like a mortgage—survives the bankruptcy, unless a Reaffirmation Agreement is signed and entered by the Bankruptcy Court which takes the debt out of the bankruptcy.
In a Chapter 13, the debt is paid, and the lien secures, the note terms as outlined in the Chapter 13 Plan confirmed by the Bankruptcy Court. This allows a debtor to renegotiate the terms of secured debt in a Chapter 13 bankruptcy, or even strip a secured creditor of their security if the value of collateral depreciates and no longer secures the loan.
What types of debts are dischargeable vs. non-dischargeable?
The following debts are typically discharged:
- Credit card charges
- Collection agency accounts
- Medical bills
- Personal loans from friends
- Utility bills (past due amounts)
- Dishonored checks
- Auto accident claims (except those involving drunk driving)
- Business debts
- Money owed under lease agreements
- Civil court judgments
The following debts are typically not discharged:
- Certain taxes
- Debts from spousal support or child support
- Debts from government agencies
- Fraud claims
- Court fines and penalties, including criminal restitution
- Attorney fees in child custody and support cases
- Student loans
- Regular income tax debt