Understanding Bankruptcy in Texas: Chapter 7 vs. Chapter 13
Filing Bankruptcy-The Stigma, Fears, And Questions
The first time you walk into an attorney’s office to discuss filing bankruptcy you feel a little dirty.The bad news is, the feeling you have, probably more accurately described as guilt and shame doesn’t go away after the first meeting, it can last for years.
Filing bankruptcy raises many concerns (fears) for most people. How will a bankruptcy affect your home, car, job, and your reputation? Of course, these are all legitimate questions you should ask yourself.
We are not attorneys, but because we help people who need to sell their houses for cash as-is, we frequently run into this situation, and we can become a part of your team if you need us. First, you have to move past the shame and guilt.
Filing Bankruptcy Is A Business Decision
If you’re old enough to file for bankruptcy, then you’re probably old enough to remember the great recession of 2008, when the federal government made loans with taxpayers money to save the auto and banking industry from complete failure.
The men and women sitting in the boardroom of these organizations had discussions that centered around the best path forward for their organizations, not around their feelings of guilt or shame because of their actions.
So I encourage you to do for your family, as they have done for their corporations, make rational, strategic business decisions that are in your families best interest.
Build A Support Team Early In The Process
Talk to experts who can provide you with sound financial advice. Think of ways to stay active and focused during the process. Talk with a friend, your spouse, or your religious leader. Get legal advice early, don’t wait.
To help our visitors who might be considering filing for bankruptcy, we have gathered some information that you may find helpful, it is not complete and certainly not a substitute for legal advice.
Filing for bankruptcy is a big decision. Most of the people who contact us are interested in selling their home. We can also make “cash contract” offers to the trustee responsible for your case, if there is a liquidation sale.
We’ve listed four types of bankruptcy cases with brief descriptions below.
Four Types Of Bankruptcy Cases:
- Chapter 7, known as “straight” bankruptcy, or “liquidation,” requires you to give up property that exceeds certain limits (called “exemptions”) so the property can be sold to repay creditors.
- Chapter 11, known as “reorganization” is used by businesses and a few individual debtors whose debts are unusually large.
- Chapter 12 is reserved for family farmers.
- Chapter 13 is called “debt adjustment.” It requires you to file a plan to repay debts (or parts of debts) based upon your current income.
It’s not well known by most consumers, but the majority of people who enter into a Chapter 13 never complete the plan. We monitor the list of bankruptcies in North Texas every month, and we can see the people who filed, but were unable to finish their payment plan.
Sometimes it’s because homeowners can refinance their personal property and pay off creditors, which mean they actually completed the plan early, but to a person who is just reading court documents, it looks like another uncompleted plan.
So for our purposes, we will provide information on the two most common types of Bankruptcy we see with homeowners, Chapter 7 and Chapter 13.
What Is A Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a process where an appointed trustee collects, assesses, and sells any assets you own which are not exempt. The trustee is paid to liquidate and distribute the net proceeds to your creditors. You are paid any amount that was exempted. (Texas Exemptions)
If you are paying alimony, child support, and student loans, these debts cannot be discharged in addition to other types of special debts.
Chapter 7 (Straight Bankruptcy)
The Texas Chapter 7 bankruptcy laws offer some of the strongest property protections of any state in the country. Filing for Chapter 7 bankruptcy is usually a good option for people who have a lot of;
- Credit Card Debt
- Medical Bills
- Personal Loans
- Payday Loans
- Utility Bills
This debt may be completely dismissed through the Chapter 7 discharge.
One thing that sets Texas apart from other states, besides being a strong property rights state, is the strength of its Chapter 7 exemptions. If a Chapter 7 exemption covers your property, then that property cannot be sold to cover your debts. In Texas, your home is entirely exempt (known as a “homestead” exemption), as is one car and up to $60,000 worth of property for a family!
Chapter 7 is a powerful way to discharge your debt, but not everyone qualifies. To file for Chapter 7 bankruptcy protection in Texas, you must pass a means test, obtain credit counseling and complete a debtor education course. The means test is the most complicated part of the process. The test involves comparing your income to a Texas family of the same size.
For instance, a single-earner household in Texas must earn less than $41,354. A two-earner household in Texas must make less than $56,296 and so on. The good news is most people who pursue Chapter 7 bankruptcy in Texas ultimately do qualify.
What Are Some The Advantages To Filing For Chapter 7 bankruptcy?
- You stop collection efforts when you file (you can breathe again)
- You get to start over (at the back of the line, but at least you’re in line again)
- The money you make is yours to keep after filing Chapter 7
- You can complete this process in 90 to 180 days
Chapter 7 Bankruptcy Disadvantages
- Your home and car may not be covered (check with your attorney)
- This may not be the best option if your home is in foreclosure
- If you have co-signers, creditors may go after them unless they file for protection
- You can only file Chapter 7 eight years after you have filed your first case
What Is A Chapter 13 Bankruptcy?
Chapter 13 allows you to propose a repayment plan to your creditors that will satisfy some or all of your debt in 3-5 years. You have to have sufficient income for a Chapter 13 to be successful.
Chapter 13 (Reorganization)
Chapter 13 bankruptcy is the one we see the most when we are contacted to make a “cash contract” offer on a home.
Chapter 13 works when you have a regular steady income. Unlike Chapter 7, you do not have to means test to qualify for this form of bankruptcy. Instead, Chapter 13 examines your ability to repay your total secured debt as the primary qualification. Chapter 13 bankruptcy will allow you to come up with a 3-5 year plan to repay your creditors. If you stick to the terms of the repayment agreement, all of your remaining dischargeable debt will be released at the end of the plan.
If you are experiencing a temporary setback, like a job loss, a major illness, or substantial medical bills, a Chapter 13 filing might give you some reprieve. The court will typically grant an “automatic stay,” that prohibits further collection from your creditors.
Chapter 13 may work well for Texas high-income earner’s who cannot qualify for Chapter 7 bankruptcy.
What Are Some Of The Advantages Of Filing Chapter 13 Bankruptcy?
- You get to keep everything (all property types -exempt and non-exempt property)
- Your debts may be reduced in your payment plan
- You get protection against creditors and garnish wages
- You may be able to discharge some debt even with a Chapter 13 filing
- You protect your co-signers
- You can protect your home from foreclosure (only if you stay compliant)
- You buy yourself a little extra time to pay off your debt
- You can file a Chapter 13 multiple times
What Are The Disadvantages To A Chapter 13 Bankruptcy?
- Your legal cost are higher than a Chapter 7 Bankruptcy
- It takes longer to get out of debt
- You have to stay compliant during the term of your agreement 3-5 years
- You cannot file if you are a stock or commodities broker
You could also consider consolidating your payments through a credit counseling service.
Under a consumer credit counseling plan, your creditors may be willing to lower your interest rates and accept reduced payments over a longer time period. Generally,these programs will require you to deposit money into an account each month that is overseen by the credit counseling service. The agreement might also prevent you from opening any new credit cards or taking out new loans during the plan period.
Whatever you choose, don’t wait until the last minute to reach out for help. Talk to an attorney, credit counselors, call or email us to get a “cash contract” offer on your home to see where you stand if you need to sell quickly.