Who qualifies for Chapter 7 bankruptcy?

There are two primary issues when trying to determine if a person can qualify for Chapter 7 bankruptcy. The first and simplest is a time component. A person cannot have gotten a discharge from a previous Chapter 7 bankruptcy within 8 years of filing a new Chapter 7 bankruptcy. They also cannot have received a discharge from a previous Chapter 13 bankruptcy within 6 years of the filing date of the Chapter 13 bankruptcy. 

The second and more problematic issue to address in filing a Chapter 7 bankruptcy is the Means Test. The Means Test was put in place in 2005 with the introduction of the Bankruptcy Abuse Prevention and Consumer Protection Act or “BAPCA”.  The Means test establishes a formula that an attorney must use to determine whether or not an individual will qualify for Chapter 7 Bankruptcy relief.  In simplest terms, all of the income of an individual is compared with median income in their geographic region. There are previsions for adjustments for high medical costs, child educations and similar issues. To qualify for a Chapter 7 Bankruptcy an individual’s income, when adjusted for various household costs, must be lower than the median income for a household of the same size.

What can an individual keep if he or she files Chapter 7 Bankruptcy?

The biggest misconception about Chapter 7 Bankruptcy is that an individual will lose all of their assets.  This is not true. In fact in most cases a debtor filing for bankruptcy will keep all of their property.

In Texas, a person filing for Chapter 7 Bankruptcy has the opportunity to choose between the Texas State Exemptions or the Federal Exemptions. The biggest difference between the two is that the Texas exemptions are asset based while the Federal Exemptions are value based. The Federal Exemptions also provide for a “Wildcard” deduction that can be applied to any asset. The Texas exemptions on the other hand do not provide for “Wildcard” but do have provisions for you home, cars, guns and cattle. 

Who should file for Chapter 7 Bankruptcy?

There is no set rule that says an individual must have a certain amount of debt. As a rule of thumb I believe that you should have at least $10,000 in outstanding unsecured debt before filing bankruptcy. Many people file for other reasons. Often times an individual is filing so they can be better positioned to make a large purchase, like a house. Other times people are being encouraged to file for employment purposes so that can get security clearances.

If a person is considering filing for bankruptcy, the best thing they can do is meet with an experienced bankruptcy attorney. My office provides free consultations with an attorney. 

Chapter 13 Bankruptcy to Prevent Foreclosure

A Chapter 13 Bankruptcy can stop a foreclosure from taking place as long as the bankruptcy is filed before the foreclosure date. By law, a Creditor must provide at least 20 days notice of a foreclosure sale. Foreclosure sales take place on the first Tuesday of every month here in Texas.  The Chapter 13 Bankruptcy works by creating an “automatic stay” which makes the foreclosure unlawful and invalid.  This “automatic stay” also can be used to prevent repossession, eviction and wage or account garnishment. 

Chapter 13: The Plan of Reorganization

In all Chapter 13 Bankruptcies, a Plan of reorganization must be filed.  This Plan can be either 3 year or 5 years in length.  It cannot be longer than 5 years. The proposed Plan is submitted to the Court for review by a trustee as well as any Creditors.  The Plan must demonstrate that all available disposable income is being devoted to repayment of Creditors.  That repayment can vary between 1% or 2% of the total debt up to as much as 100% of the total debt.  To determine the amount that an individual must repay, an attorney will compare his client’s income to the income of other people in the area with the same household size.  The further a household is above median income the more they will have to pay back to their creditors. 

Chapter 13: Confirmation and Approval of the Plan

The Plan is subject to objections from Creditors. Most commonly is a creditor objection because they do not believe the correct amount is being paid to them. This objection can be brought if the Creditor feels that certain deductions from household income are not reasonable, if the creditor believes there is “non-exempt property”, or if the actual amount or interest rate is not being properly reflected.  An attorney will work with the creditor to negotiate an agreement or if necessary go to Court to present arguments to the judge. Once those objections are resolve the Bankruptcy Plan can be Confirmed. 

Chapter 13: What happens next?

Once the Plan is approved the Debtor must make all of his payments. The Trustee will contact the debtor’s employer to set up a deduction from the debtor’s paycheck if appropriate under the circumstances. It remains the debtor’s responsibility to make sure all payments are being made. The also has an obligation to keep the trustee informed of any substantial changes. This can mean changes in income or household size. Every year while in bankruptcy the Debtor must provide the Trustee’s office with a copy of a tax return.

If the Debtor complies with his payment plan he will receive a discharge of any remaining unsecured debt. His home or vehicle will be up to date and he should be in good shape to avoid future financial issues.