Chapter 7 Bankruptcy Information

Chapter 7 of the United States Bankruptcy Code is commonly known as a liquidation bankruptcy. Both individuals and businesses may file under Chapter 7. Eligibility is determined, in part, by a "means test", which analyzes your average income versus your expenses, as determined in part by the IRS local collection standards.

Under Chapter 7, or any chapter of the Bankruptcy Code, you are required to list all of your assets and all of your debts on your petition.

An asset is anything you own or may have a right to own at some future date (for example, if you are in someone's will). Federal bankruptcy law and Texas law (and other states not discussed here) allow a person to retain certain property to help them start over after completing bankruptcy. In many Texas cases, all of an individual’s assets will be exempt. Every case is different. A detailed analysis of exemptions is not possible here.

Chapter 7 does not prevent voluntary repayment of any debt. Some secured creditors, such as car loan creditors, will insist upon a repayment agreement (known as a “reaffirmation agreement”) or they will exercise rights to repossess the collateral. This happens on a case by case basis.

Should you file Chapter 7?

The goal of most people in filing any personal bankruptcy is to obtain a discharge of their existing dischargeable debts and to take advantage of the *fresh start* it provides. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy and that were discharged. The creditors are entitled to share in the proceeds obtained from the liquidation of your non-exempt assets, but you are able to move on with your life.

Certain debts are non-dischargeable in a Chapter 7. For example, alimony and child support obligations, taxes less than three (3) years old, almost all student loans, debts procured by fraud,, incurring debt without a reasonably certain ability to repay the debt, and so forth. For some of these debts, the creditors are required to bring court action in the bankruptcy court to determine whether the discharge will apply to their debt.

Assuming you need to file a bankruptcy, the only way to determine which Chapter to file under is to first compare your options under the other available Chapters. Generally, Chapter 7 is the cheapest, quickest and least painful of the three major Chapters (the others being 11 and 13). Costs and fees vary depending on the number of creditors you have, complexity of your case, and other factors. We offer free consultation to help you determine your options.

If you are an individual, and meet the requirements, Chapter 7 may allow you to discharge most or all of your debts. It allows you to do this regardless of how many assets you have or how much your creditors ultimately receive. Corporations do not receive discharges of debts, but there still may be some benefit to allowing a trustee to liquidate the assets.

What are some of the disadvantages?

You are only eligible for a Chapter 7 discharge if you have NOT received a discharge in a PRIOR Chapter 7 within eight years of the filing date of the prior case. If you are a corporation, you must stop operating your business immediately upon filing the Chapter 7 petition. Only under extraordinary circumstances will the Trustee operate a business. If you have property that cannot be claimed as exempt, you may lose that property! Every case is different, so take advantage of our consultation to determine how it would work out for you.

Can I pick and choose who to put in my bankruptcy?

Absolutely not. You must list all your assets and all your debts in ANY chapter of bankruptcy. You may voluntarily repay anybody you want after your case is concluded (and you are required to repay any debts that are not discharged), but you are still required to list all your creditors.

What about your credit rating?

The bankruptcy will appear on your credit report for up to ten (10) years after you file. However, the delinquent debts, collections, foreclosures, etc., should be listed as “discharged” after you complete your bankruptcy. This can sometimes even improve your credit rating. According to many of my former clients, obtaining credit after bankruptcy is usually not as big a problem as most people think. Potential creditors know you won't be able to file another bankruptcy for at least 8 years, and therefore, they don't have that risk to bear. You will not get as high a credit limit as you once had, or be able to borrow a large sum of money, but getting some credit (such as a secured credit card) shouldn't be that difficult and you can rebuild your credit over time. For a while, you will likely face is higher interest rates, required higher down payments, more points, etc. Many discharged debtors have qualified for favorable mortgages within a couple of years after receiving their discharge. Some people do have difficulty rebuilding their credit, but it is usually due to other factors besides bankruptcy, such as their employment record, other credit problems, etc. In any event, I can provide you with excellent materials for helping you rebuild your credit should you so desire.

A word about credit cards and cash advances

Any debt aggregating more than $500.00 from any single creditor for non-essential, “luxury" goods incurred within 90 days before filing, or for cash advances totaling over $750.00 on a credit card, incurred or taken within 70 days prior to filing the bankruptcy, are presumed to be non-dischargeable. Obviously, the Bankruptcy Code tries to discourage would-be debtors from "running up" their credit charges and then filing bankruptcy. To be safe, do not use your credit cards for anything other than food, clothing and other essentials during this two month period (actually, it's best not to use them at all). It may also be considered grounds for objecting to your discharge if you have taken cash advances on one credit card to pay the minimum balances on the others, or if you transfer balances from one card to another shortly before filing bankruptcy. You should consult with your attorney about your personal situation. This particular provision is just a presumption of non-dischargeability. It does not mean that if you wait more than 60 days you are magically free from non-dischargeability issues; nor does it mean that if you file the bankruptcy within the 60 days that you won't be able to discharge that debt. What it basically does is shift the burden of proving that the debt should or shouldn't be discharged onto the debtor during that 60 day period (rather than on the creditor where it would otherwise be).

What debts can be discharged?

Many debts are dischargeable in a Chapter. 7 case, with several notable exceptions. Your attorney can tell you which of your debts can be discharged. The information below is not exhaustive or complete, but a few of the most common or problematic ones are discussed below:

Discharging student loans

For cases filed after October 7, 1998, Student Loans are only dischargeable if: 1. You can prove that having to repay it would impose an "undue hardship" on you (as defined below).

Section 525 of the Bankruptcy Code prohibits discriminatory treatment by any governmental or other student loan program on the basis of filing a bankruptcy. In other words, a student loan agency cannot deny your loan application based on the filing, by you or your parents, of a bankruptcy.

Discharging taxes and removing tax liens

Certain types of tax obligations, such as income taxes, may be discharged under specific circumstances. Many required factors must be met before any tax can be discharged under Chapter 7 or Chapter 13.

Discharging fraud judgments or debts where fraud may have been involved

Debts that you incurred which were the result of an intentional or even negligent misrepresentation on your part are not dischargeable in a Chapter 7. Examples of these might be if you misstated your income on a credit card application, made false statements in order to induce someone to give you a loan, ran up your credit card debt shortly prior to filing bankruptcy, used your credit card or obtained a loan without any intent to repay it, or if someone has obtained a court judgment against you based on fraud.

Can you be fired or denied employment because of a bankruptcy?

No. While an employer can usually find some reason to fire anyone, they cannot use bankruptcy as a basis for doing so. Again, this is set forth in Section 525 of the Bankruptcy Code. (See above)

Retirement accounts and pension plans

Retirement accounts and pension plans are usually exempt property that you may retain. Consult your attorney to ensure that yours is not one of the rare situations where this is not the case.

Getting rid of other liens, abstracts of judgments, and trust deeds recorded against your property

The bankruptcy code provides broad powers which can enable you to avoid liens that were placed against your personal property or real property (like a house). It is too complicated an analysis to deal with here, but if you have liens against your property, make sure to discuss this with your attorney.

Types of liens you may be able to get rid of include judgment liens recorded against your home or specific personal property. Also, in a Chapter 13 junior trust deeds against your home may be able to be removed under certain specific circumstances. This is not an option in a Chapter 7, so make sure to check out the Chapter 13 page and consult with an attorney.

Paying your taxes with your credit card

Debts incurred on your credit cards to pay taxes to the IRS will usually NOT be dischargeable in chapter 7 but may be dischargeable under Ch. 13.

Make an appointment now by calling 866-603-0804

Located in Dallas, Texas, Harriet Langston, P.C., represents individuals and businesses in bankruptcy matters and assists clients with financial solutions outside of bankruptcy, when possible, for residents and businesses in and around Cedar Hill, Dallas, DeSoto, Frisco, Highland Park, Park Cities, Plano, Red Oak, Rockwall and University Park.