In a Chapter 7 bankruptcy a debtor can wipe out their debts to get a “Fresh Start”. Chapter 7 bankruptcy is a liquidation where the trustee collects all of the non-exempt assets. (see Texas Exemptions) The trustee sells what assets they can and the profits of the sale is distributed to the creditors minus the trustees fees. Most consumers that file Chapter 7 have little or no assets that actually get sold. To qualify for a Chapter 7 bankruptcy a debt must make below a certain income and pass the Chapter 7 bankruptcy means test.
Certain debts cannot be discharged in a Chapter 7 bankruptcy, such as alimony, child support, fraudulent debts, certain taxes, student loans, and certain items charged. (see Texas Non-Dischargeable Debts) In most Chapter 7 cases, the debtor has large credit card debt and other unsecured bills and very few assets. In the vast majority of cases a Chapter 7 bankruptcy is able to completely eliminate all of these debts.
Debtors may keep certain secured debts such as your car or house by reaffirming those debts. To do so, debtors must sign a voluntary “Reaffirmation Agreement”. If they decide that they want to keep their house or their car, and they reaffirm the debt, the debts cannot be included in a bankruptcy (or wipe-out) that debt again for eight years. Debtors will still owe that debt and they must continue to pay it just as they were obligated to continue to pay it before they filed bankruptcy. In order to reaffirm the debt, they must also bring it current. In other words, if a debtor is three or four months behind, then they must pay the back payments which are due in order to reaffirm it. Debtors can selectively reaffirm their debts – they can state that they wish to keep the house but that the car can go back to the creditor.
Reaffirmation agreements can be set aside during the earlier of 60 days after the agreement is filed with the Court, or upon the Court’s issuance of an Order of Discharge.
Advantages to a Texas Chapter 7 filing:
- Receive a complete fresh start. After the bankruptcy is discharged the only debts that are owed will be for secured assets on which “Reaffirmation Agreement” is signed.
- Immediate protection against creditor’s collection efforts and wage garnishment on the date of filing.
- Wages earned and property acquired (except for inheritances) after the bankruptcy filing date remain the consumers, not the creditors or bankruptcy court.
- There is no minimum amount of debt required.
- Cases is often over and completely discharged in about 3-6 months.
Disadvantages to a Texas Chapter 7 filing:
- Loss of non-exempt property which is sold by the trustee. If a secured asset is kept, such as a car or home, and it is not completely covered by Texas bankruptcy exemptions and Chapter 7 is not an option.
- If facing foreclosure on a home, the automatic stay created by the Chapter 7 filing only serves as a temporary defense against foreclosure.
- Co-signors of a loan can be stuck with a debt unless they also file for bankruptcy protection.
- If a prior case is filed and it received a discharge of debts, a second Chapter 7 bankruptcy case can be filed eight years after first case is filed.