Chapter 7 bankruptcy is what most people think of when they think of bankruptcy. In most cases, all of a debtor’s property is exempt and protected. You must “pass” the Means Test to qualify, or show that even though you didn’t “pass” the Means Test, you should be permitted to file due to your circumstances. You attend a hearing with your Chapter 7  bankruptcy lawyer which is held twenty to fifty days after your case is filed. A discharge of debts is received about two months after the 341 hearing. The whole process generally takes three to four months after filing.

How a Chapter 7 Bankruptcy Works

This is a liquidation bankruptcy, sometimes called “straight bankruptcy”.  The purpose of a Chapter 7 bankruptcy is to give an honest debtor a “fresh start.” To file a Chapter 7 bankruptcy, the bankruptcy lawyer uses information and documents provided by the debtor to prepare the bankruptcy petition, schedules and statements and files them with the bankruptcy court.  This bankruptcy paperwork contains a summary of the debtor’s finances. The debtor must list all of his or her assets and all of his creditors.  The debtor is permitted to protect his assets using exemptions.

The principle advantage of a Chapter 7 bankruptcy is that the debtor comes out without any future obligation to repay his discharged debts. Chapter 7 bankruptcy is an excellent tool for a fresh start when a debtor has a large amount of unsecured debt, such as credit cards, medical bills, or signature loans. Chapter 7 bankruptcy cannot help you catch up on a delinquent mortgage, car or other secured item.  Chapter 7 bankruptcies are the cheapest, fastest way to obtain relief. There is more and different relief available in other chapters, but Chapter 7 bankruptcy may be all a person needs to get back on their feet.

Generally, bankruptcy cannot change the terms of a mortgage. If a debtor wants to keep an item (Ex: house or car) which is security for a loan, he must continue these payments. If the debtor wants to discharge that car loan (not be obligated on the debt any longer), then he must surrender the car to the creditor. There is also a third option for keeping secured personal property in a Chapter 7 bankruptcy, called redemption. In redemption, the debtor pays the value of the item, rather than what is owed.

There are certain types of secured debts where there is a lien against property where the lien can be removed in a Chapter 7 bankruptcy. For example, some loans are made by finance companies where the borrower gives the lender a lien against household goods. This type of lien can be removed and the debt discharged.

A Chapter 7 debtor is seeking a discharge of his obligations to pay his debts. However, bankruptcy does not discharge most taxes, student loans, domestic support obligations, or certain other debts.  As with everything under the law, there are exceptions. For example, with tax debt, depending on how old the tax debt is; what type of taxes are owed, and when the return is filed, some taxes can be discharged. Some people can discharge student loans if they can prove hardship. A complete review of each person’s debts must be made to determine what debts, if any, will remain after discharge.

In a Chapter 7 bankruptcy, most of the debtor’s property or assets are protected by law. In rare cases, the bankruptcy trustee will take the unprotected or non-exempt assets and sell them to use the funds to distribute pro-rata among the creditors. The majority of cases are “no asset” cases meaning there are no assets that are unprotected by exemptions. Or, if there are nonexempt assets, they are so nominal that there is no real benefit to the creditors when they are sold.

Hiring a Chapter 7 Bankruptcy Lawyer

You need a Chapter 7 bankruptcy lawyer in order to protect your property from liquidation by the Chapter 7 Trustee. Exemptions are used to protect property and most people do not lose any property, but your exemptions must be properly applied. If you have recently used your credit cards, you may have nondischargeability issues. If you have recently transferred property to a relative or friend, you may have problems, or your friend or relative may have problems if you file your bankruptcy without experienced advice from a Chapter 7 bankruptcy lawyer. Experienced Chapter 7 bankruptcy lawyers understand how to get around potential problems. Don’t try to go it alone!

Chapter 7 Bankruptcy Means Test

Since 2005 when the Bankruptcy Reform Act was passed, a person wanting to file a Chapter 7 discharge must qualify by “passing” a means test. Technically, you don’t really fail the means test, it’s just an easy way to think about the requirements. Essentially, what this means is that the family’s income after deduction of certain expenses must be below a certain level which establishes that the debtor has no means to pay back the debt. This “means test” is determined by using the past 6 months of wages and certain expenses. However, if there have been changes in a debtor’s income or expenses, he may show special circumstances to overcome the presumption of ineligibility for Chapter 7 bankruptcy. If a debtor doesn’t “pass” the means test, and still needs to discharge debt, he still has the option of filing a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, the debtor would probably pay back some percentage of his unsecured debt. This doesn’t mean that you are required to pay back 100% of the debt — it means you pay back what you can reasonably afford to pay back. There are guidelines and standards for determining what you can afford.

Keeping Your Stuff in a Chapter 7 Bankruptcy

State and federal laws provide what are called “exemptions.” Exemptions are used to protect property from liquidation or sale in a bankruptcy. Texas permits most debtors to choose between the Texas state and federal exemptions. If you have been living in Texas for the last 730 days, chances are you will be able to protect all of your property and you will have what is called a “no asset” chapter 7 bankruptcy case. This doesn’t mean you have “no assets.” What it means is, you have no assets that are not protected! In the event that you do have non-exempt assets, you can still keep them — just not in a Chapter 7 bankruptcy. You may need to file a Chapter 13 bankruptcy.

People are most concerned about whether they will lose their home in a bankruptcy. If the Texas exemptions apply to you, you may protect a home of unlimited value. There are limits on acreage, however. You may protect 10 acres in the city and 100 acres in the country (which can be doubled for a family – so up to 200 acres of rural property). An important exception is the 1215 day rule. This rule provides a cap on the amount of homestead equity you can exempt out if it was acquired within the last 1215 days.

If you don’t have a lot of equity in your home, your attorney may recommend the federal exemptions. The federal exemptions have the advantage of a wildcard exemption. This is an exemption that you can use to protect any property that is not already protected under some other exemption. For example, a tax refund, cash or stock, or rental property. The amount of the wildcard cap changes periodically. Right now, you can protect up to $21,265  in your homestead. To the extent you do not have $21,265 in your homestead, you may exempt up to $10,825 plus the general wildcard of 1150 . As with most of the exemptions, where both husband and wife file together, you can double the available exemptions.

If you have moved here from another state, or have not lived in Texas for the last 730 days, you can still file bankruptcy in Texas once you have lived here for 91 days, but another state’s exemption choices may apply. An exempt asset is determined by the law that applies and allows a debtor to keep certain property. Depending on the type of property, there may be dollar value limits imposed.

Exemptions are critical and is important that you disclose all of your assets to your bankruptcy lawyer. Again, it may be possible to do some pre-bankruptcy planning to maximize your exemptions.

Protecting Your Property in a Chapter 7 Bankruptcy

If the non-exempt (non protected) assets have a high enough value to provide for payment of the trustee’s fees and expenses and have money remaining to distribute to the unsecured creditors, the trustee will take these non-exempt assets, liquidate them to cash, and distribute those assets pro-rata to the creditors. Although there is no magic dollar figure, the trustee has authority to abandon a certain amount of non-exempt property.  Again, to avoid losing non-exempt assets, a debtor can choose to file a chapter 13 bankruptcy.

Texas Bankruptcy Exemptions

Below is a list of the major exemptions in Texas. Keep in mind the amounts periodically change:

Homestead or proceeds from the sale of the homestead for up to six months after the sale. If the homestead is an urban homestead, up to 10 acres in contiguous lots may be exempted. A rural homestead may be exempted up to 200 acres for a family or up to 100 acres for a single individual. If you have not owned your homestead for 1215 days, different rules may apply.

1. Personal property up to $30,000 ($60,000 for a family or head of household).
2. Certain types of insurance proceeds, annuities, and pensions.
3. Public benefits, such as medical or public assistance or unemployment income.
4. Tools of the Trade, including a motor vehicle or boat, up to $10,750.
5. Wages – 100% of earned but unpaid wages and 75% of unpaid commissions.
6. Certain retirement plans such as an IRA, 401(k).
7. Tractor, specific number and type of livestock, and certain farming tools.
8. One motor vehicle per driver up to a certain limit.
9. Two firearms.

Keep in mind that if you are filing with a spouse, many of the exemptions double. Even where the debtor chooses the Texas state exemptions, some exemptions under federal law, such as social security benefits, or certain types of retirement plans can be exempted. Although there are a few other items which may be exempted under Texas law, most people filing bankruptcy do not own or hold any exempt assets other than those listed above.

The most common non-exempt assets that the bankruptcy trustee liquidates in Chapter 7 proceedings are real property other than one’s homestead; debts owed to the debtors such as pending tax refunds; a portion or all of a personal injury claim or other potential claims or lawsuits in which the debtor holds an interest, and inheritance interests in estates.

Federal Bankruptcy Exemptions

The primary Federal exemptions are listed below. Keep in mind, the amounts periodically change.

1. Homestead – up to $21,265 in equity (double for a joint filing) can be used to exempt the debtor’s homestead. Where the debtor owns no homestead, he can use $1150 plus an additional $11,525 (double for a joint filing) to exempt any real or personal property.
2. Household Goods – $550 per single item for a total of to $11,525 (double for a joint filing).
3. Certain retirement funds and benefits.
4. Certain life insurance policies.
5. Insurance, including disability, illness or unemployment benefits.
6. Alimony and child support needed for support.
7. Motor vehicle up to $3450.
8. Personal injury recoveries to $21,625 (not to include pain and suffering or pecuniary loss). Wrongful death recoveries for death of person debtor depended on for support.
9. Crime victims’ compensation, public assistance, social security, unemployment compensation, veterans’ benefits.
10. Implements, books and tools of trade to $2,175.
11. Wild Card – $1150 of any property plus up to $10,825 of unused portion of homestead, for any property.

Secured Debts (Mortgages and Car Loans)

Secured debts are those where the creditor has a security interest in property. Normally, a security interest is obtained in writing, such as a deed of trust on a home, or by taking a lien against a car title. Sometimes, security interests arise when a seller finances the item, such as a computer purchased at a big box retailer on the store credit card.

A debtor generally has three options on secured debts, where the creditor is holding collateral to enforce the payment of the debt: reaffirmation, redemption, or surrender. The most common examples of secured debts are home mortgage loans, automobile purchase loans, seller’s or vendor’s liens retained at the time of purchase by retailers such as Sears or jewelry stores, loans by finance companies taking such items as VCR’s, TV’s, stereos as collateral.

Reaffirmation Agreements and Secured Debt

First, the debtor can reaffirm the debt, meaning that the debtor agrees to keep making payments as if there had never been a bankruptcy filing. On most auto loans and house mortgages, the creditor will require that the entire loan be reaffirmed, the loan be current and that the regular monthly payment be maintained. Most loans secured by household goods (if valid) can be renegotiated, reducing the balance and the monthly payment.

If a debt is reaffirmed in either manner, the debtor is then entitled to retain the property. Failure to make payments following the reaffirmation of a debt can result in foreclosure or repossession of the item(s) and collection of the deficiency after the sale. Home equity loans may or may not have to be reaffirmed. They are non-recourse debts which means that if the lender forecloses and doesn’t get enough money to pay off the loan, the lender cannot come after the debtor to collect the deficiency.

Sometimes, creditors will negotiate a more favorable interest rate or repayment terms for a reaffirmation agreement. This is voluntary on the part of the creditor, however, and they cannot be forced to give better terms. There is a sixty day period where the debtor may revoke a reaffirmation agreement. If they do not revoke within that time period, they must pay the debt back or they will be financially responsible for the debt despite the bankruptcy.

Redemption of Secured Personal Property

Second, the debtor can “redeem” the collateral by making a one-time lump sum payment equivalent to the value of consumer goods. For example, if a debtor owes $10,500 on a car and it is only worth $6,000, the debtor can obtain clear title to the car by paying the creditor $6,000. Obviously, most debtors cannot use redemption as a method to retain the collateral due to having to come up with a lump sum of cash. We do frequently see redemption of consumer items that depreciate rapidly, such as furniture.

Surrendering or Giving Up Property (and the Payment!)

Third, the debtor can surrender the collateral back to the creditor. The entire debt will then be discharged, and the creditor cannot collect a deficiency balance following the sale of the item. In a Chapter 7 bankruptcy, debtors frequently surrender a home or a motor vehicle where there is no equity and the payment is too big for their current income level.

Avoiding Liens in Chapter 7 Bankruptcy

Judgments Against Homestead

Occasionally, a debtor has a judgment that has already been enrolled in the land records and attached to his homestead. While a creditor generally cannot take a homestead and force a sale to pay the judgment, the judgment is attached to the homestead, clouding the title and accruing interest. Bankruptcy can be used to unattach or void the judgment lien because it impairs the homestead exemption. This is done by a motion and Court Order.

Liens Against Household Goods

In some instances, a debtor may avoid a lien, retain the collateral and discharge the debt. If a creditor such as a finance company has a non-purchase money lien on household goods such as a microwave, lawn mower or furniture, the debtor can avoid the lien pursuant to 522(f) of the bankruptcy code. To do this the item must be exempt (See explanation of exemptions in Texas or Federal exemptions).

341 Hearing aka Meeting of Creditors in Chapter 7 Bankruptcy

Every debtor must attend a “meeting of creditors”. The name implies that all the creditors will attend that meeting. However, it is rare, except in a business case, for any creditors to attend.  This hearing is more the opportunity for the Trustee to confirm that the information provided is accurate and for the Trustee to question the debtor regarding income or assets. The meeting usually takes between five and fifteen minutes. At our lawfirm, the attorney prepares you for  and attends the hearing with you. At the hearing, the Trustee asks the debtor some basic questions about information in the schedules (papers filed with the bankruptcy petition) or any other information pertaining to the bankruptcy. In a Chapter 7, the Trustee may ask about the debtor’s desire to retain the items which are collateral for the secured loans.

You have to attend the 341 Meeting. If you cannot attend for a legitimate reason, such as medical issues,  it may be possible to obtain a Court Order permitting your spouse to attend in your absence and answer questions.

In the Eastern District of Texas Bankruptcy Court, the Chapter 7 bankruptcy 341 hearings are held in Tyler or Marshall depending on the County where your case is filed (which is usually determined by the debtor’s domicile at the time of the filing of the bankruptcy petition).
If you live in:
Camp, Cass, Harrison, Marion, Morris or Upshur County,
your hearing is held in
Marshall at the state courthouse on the 4th (top) floor (200 West Houston).
The hearings held in Marshall are generally on the second and fourth Monday of each month in the afternoon.
If you live in:
Anderson, Cherokee, Gregg, Henderson, Panola, Rains, Rusk, Smith, Van Zandt or Wood County,
your hearing is held in
Tyler at the Plaza Tower (110 N. College) on the 3rd floor.

The hearings held in Tyler are generally on the first and third Friday of each month between 9:00 a.m. and 3:00 p.m.

Receiving Your Discharge in Chapter 7 Bankruptcy

This is a really happy day for most people because finally they are out from under the stress of all that debt. As a general rule, most unsecured debts will be discharged in a Chapter 7. An unsecured debt is a debt where the creditor is not holding any collateral or security to enforce payment of the debt. The most common examples of unsecured debts are credit cards/credit lines, medical bills, and utility bills.

In Chapter 7 bankruptcy, each debtor will receive a Discharge Order by mail about 2 months after the 341 meeting of creditors, which will indicate that their debts have been discharged. This discharge, however, will not include secured debts that have been reaffirmed, or any non-dischargeable debts (See Above). If a creditor objects to discharge of a debt or other litigation is filed, the discharge may be delayed.

What You Must Do To Obtain Discharge in Chapter 7 Bankruptcy

Before you can obtain your discharge, you must take pre-discharge bankruptcy counseling. You can take it from the same company that you took the pre-petition counseling from – only this is geared more toward personal financial management. You have only 45 days from the Meeting of Creditors to take this. If you miss the deadline, your case will be closed, but you will not be discharged because you failed to meet the personal financial management requirement. If you are allowed to re-open, you have to repay the $299.00 filing fee. Ouch!