Individuals and couples have two legal avenues available to them to get debt under control and gain a fresh financial start in life. One is called a Chapter 13 bankruptcy filing, and the other is a Chapter 7 filing. Chapter 13 is based on reorganization and repayment of your debts over a three- to five-year period. Chapter 7 is a liquidation plan that leads to the sale of your nonexempt assets to satisfy creditors.
Liquidation, according to the statistics quoted above, is the most often used of the two. Though it involves the selling off of certain assets, exemptions can allow you to retain your home and your car so long as you can continue to pay for them.
In either case – 13 or 7 – the most immediate effect is called the “automatic stay,” which will take effect the day you file and your creditors are notified. You will no longer be hounded with debt collection attempts by phone, text, mail, or knocks on the door. All repossession and foreclosure efforts must be stopped as well, but the creditors can petition the bankruptcy court to be allowed to proceed.
Chapter 13 Explained
A Chapter 13 filing is for people who have a steady income but whose debt loads are unmanageable. The process begins by determining your disposable income, in other words, what’s left over after basic living expenses. That disposable income sum becomes the basis for determining your repayment plan.
In your repayment plan, you can consolidate all your debts into one overall lump sum and then pay it off over three to five years, after which you will be debt-free.
The consolidation can also result in a reduction of your obligations, but one of the first steps of Chapter 13 is a meeting with creditors, during which they can object to your repayment plan if they feel they’re not being paid enough. The court may then order you to modify your plan.
Once everything is in place, you thereafter make a monthly payment to your appointed bankruptcy trustee, who handles the creditors on your behalf. Until you’ve paid off everything, you cannot seek additional credit without the approval of the court.
Chapter 7 Explained
The Chapter 7 liquidation plan is just that – you turn over your nonexempt assets to the bankruptcy court, and they are sold off to repay your creditors, in whole or in part. The key here is the word “nonexempt.”
Both federal and Texas law allow exemptions – property and assets that the bankruptcy trustee cannot sell off. Texas allows a Chapter 7 filer to choose between the two options, but Texas exemptions are so generous that it would be foolish to choose the federal option.
Consider this: The Texas homestead exemption allows you to exempt all equity in your real estate property – up to 10 acres in a city, town, or village, and up to 100 acres in the country. You are also allowed a $50,000 personal property exemption if you are single, which rises to $100,000 if you’re married.
Under this umbrella exemption, you can exclude from liquidation your vehicles, home furnishings, tools of the trade, agricultural vehicles and tools, clothing and food, and even livestock and pets (up to limits). Jewelry is limited to $12,500 for a single filer and $25,000 for a joint filer (but must be included under the umbrella exemption).
However, there is an income means test to qualify for Chapter 7, which again in Texas is pretty generous. If you’re a single filer, you can earn up to $52,923 annually and still qualify for Chapter 7. A family of four can earn $89,196. The bankruptcy code even allows for deductions for certain expenses in calculating annual income to make it easier to qualify.
Deciding Which Option Is Best for You
Most Texans prefer Chapter 7, which may be due to the generous exemptions the state allows. One clear advantage of Chapter 7 is that you will be discharged from your debts in a matter of months and not three or five years.
A Chapter 13 might, however, give you a better feeling for having honored your obligations to the best of your ability. If your income is too high, it also might be your only option.
That being said, a Chapter 7 will stay on your credit report for 10 years; a Chapter 13 will stay for 7. Both are big hits on your credit standing.
Whichever option you choose, there are certain debts you cannot discharge, including taxes, most student loans, and spousal and child support payments, among others.
Bankruptcy is not really a do-it-yourself proposition. Just compiling the necessary paperwork involving your debts, income, and other supporting documents can be challenging. Putting together a repayment plan under Chapter 13 can be complex. You may want to give everyone ten cents on the dollar, but that might not fly. The creditors must approve your plan.