Everything You Need To Know About Chapter 7 Bankruptcy

by on January 6, 2022 in Blog

Chapter 7 Bankruptcy Basics

Of all the different chapters of bankruptcy, Chapter 7 is perhaps the easiest and most straightforward. It is sometimes called “complete bankruptcy” or “liquidation bankruptcy” (although rarely is anything liquidated). It does not involve any repayment plan; it simply discharges (eliminates the requirement to pay) any debts that are dischargeable, and whatever is non-dischargeable is up to the debtor to repay.  For that reason, Chapter 7 provides relief to those who simply need to eliminate credit card, medical, or unsecured personal loan debt.

Not everyone qualifies for a Chapter 7 bankruptcy. In order to qualify, your household income must be under the median income in the state of Texas for a family your size. For example, for a family of 4, the household income before taxes must be below $89,196. The median household income chart can be found here. All sources of income are counted, except for income received as pandemic relief and social security income. If your gross household income is over the median (or “over means”), you may still qualify for a Chapter 7 by deducting certain expenses. In this case, your attorney will complete a complex calculation, abiding by certain laws and determinations about which expenses may be deducted. If Chapter 7 is still out of reach, Chapter 13 may be a good solution in your case. It is important to discuss with your attorney all of your options for debt relief.

We stated above that it is rare that anything is liquidated in a Chapter 7 bankruptcy. The reason for this is a part of the bankruptcy code called “exemptions.”  Exemptions are like umbrellas, made to protect your belongings from liquidation. (See what I did there?) The exemptions are generous and apply to all your belongings: cars, household goods, real estate, etc. In Texas, we can choose between the federal exemptions and the Texas exemptions. The Texas exemptions are more generous for real estate, but the federal exemptions are more generous for bank account balances. Your attorney will do a full analysis to determine which exemptions are best for your case. If anything is to be liquidated in your case, your attorney will likely be able to tell you prior to filing if any of your property is at risk.

Your Chapter 7 bankruptcy will last approximately 3 months (90 days). You will file your case with the help of your attorney. When you file, you will have listed all your assets (no matter how small) and all your debts—all of them. Sometimes people want to keep one credit card. However, under bankruptcy law, you cannot “salad bar” what you keep and what you discharge. In fact, if you do not tell your attorney about one credit card, there is a strong likelihood the creditor will know about the bankruptcy filing anyway and will turn off all charging capabilities. Approximately a month after your filing, there will be a hearing, called a “341 Hearing” or “Meeting of Creditors.” This hearing is conducted by the Trustee in your case, and it is the time you swear under oath as to the accuracy of your bankruptcy petition and schedules. Creditors rarely appear in consumer cases, but it is called a Meeting of Creditors because the creditors are invited to appear and ask the debtor questions under oath.

You can expect a discharge approximately 60 days after the 341 Hearing. At that point, all dischargeable debts are discharged and you are no longer obligated to pay on those. Talk with your attorney about what debts are discharged, and what debts you will need to continue to make payments on. With three (3) exceptions, ownership of property which you acquire after the date of filing of the original petition is unaffected by the previously filed bankruptcy petition and the claims of your creditors.  The exceptions are as follows:

  1. Property inherited within 180 days (6 months) after the filing of the petition for bankruptcy.
  2. Life insurance or death benefit proceeds acquired within 180 days (6 months) after filing of the petition.
  3. Property interests acquired through a property settlement or divorce decree within 180 days (6 months) after filing of the petition.

If you learn of the right to receive any of these kinds of property within 6 months of filing your bankruptcy, it’s essential that you tell your attorney right away.

Chapter 7 Bankruptcy is intended to provide relief to people who are overwhelmed by consumer debt. If you are unable to make ends meet, or to reach your financial goals, under the burden of your debt, please give us a call to see if bankruptcy can help.