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Chapter 7

Chapter 7 (Liquidation)

If a debtor qualifies for a Chapter 7 bankruptcy, the debtor discloses to the Court and Trustee all of his or her property. In a typical case, most of that property is exempt, either by Federal or Texas law, meaning that no one can take it from the debtor. If a debtor has non-exempt property, the Trustee can sell it and use the funds to pay off some of the debtor's unsecured debt. The remaining unsecured debts are discharged. If a Debtor has secured debt, the debtor can either be current and reaffirm the debt, redeem the property that secures the debt, or surrender the property and have the underlying debt discharged.

Prefiling

One of the most important parts of a Chapter 7 case is determining whether you even qualify to file. This will be determined by the attorney. It is often straight-forward, but sometimes determining whether you can file or not takes a more in-depth analysis. This is not something you should attempt on your own. Most law firms, including The Tisdale Law Firm, will offer a free initial consultation.

Means Test

The main determining factor is income. If your household income is below the median income of a household of the same size in your state, then you qualify to file under Chapter 7. If your income is above the median income, then you may need to file under Chapter 13. You can find the median incomes used to determine whether you can file Chapter 7 bankruptcy here.

Even if your income exceeds the median income for a household of your size in your state, it may still be possible for you to file under Chapter 7 if you fall within one of the following exceptions:

1. More than 50% of your debts are non-consumer debts;

2. Most of your debts were incurred while you were active duty military, and you are now receiving disability payments from the Veterans Administration; or

3. Most of your debts were incurred while you were in the National Guard or Reserves and you were called to active duty before filing.

Petition, Schedules, and Statements

Filing bankruptcy is time-consuming and difficult. It is not for the faint-of-heart. It is not for those who enjoy their privacy. It is a very open and revealing process.  Technically bankruptcy records are public, but luckily, the only ones who really see what is filed in a bankruptcy case are those who need to know.

Typically required documents:

1. 6 months of bank statements for all accounts which the debtor has a right to withdraw funds from;

2. 6 months of pay stubs for all jobs had by each debtor filing;

3. Tax returns and supporting documents (W-2s, 1099s, etc.) for the last two years;

4. Credit reports for the 3 major bureaus (available every 12 months for free here);

5. Information for all other creditors not listed on your credit reports; and

6. A list of all of your assets and what they are worth.

Once you have gathered all of the required information, your attorney will begin to prepare the proper documents for filing. You can see the forms required in most typical Chapter 7 cases here.

Assets

Your attorney will often have a form for you to fill out to gather the information about your assets. The Tisdale Law Firm uses BKPacket to gather information about your assets. You will be provided an account and log in instructions with them once you have paid your fees with us.

Assets are anything you own: real estate, vehicles, furniture, clothing, linens, flatware, electronics, pets--the list is exhaustive and literally includes everything you own. When you are valuing your assets, it is literally the fair-market value of the property. It is not what you paid for it; it is not what it would cost to replace it. It is the amount, in cash, someone would give you for it if you sold it in a garage sale.

  Purchase Price Replacement Price Fair Market Value
Sofa $1,500.00 1,200.00 $200.00
65" Flat Screen $2,000.00 $600.00 $150.00
 
Exemptions

When filing bankruptcy, you are agreeing that in exchange for an order of discharge, the Trustee can seize your property and sell it to the highest bidder to help pay your creditors. Exemptions are what allow you to keep some (or all) of your property from being taken and sold. There are federal exemptions and state exemptions. Each state has the right to choose what property is protected or they can choose to allow residents to use the federal exemptions list or not. Some states, like Texas, have their own list and allow residents to choose which list they want to use. This allows some flexibility, but you cannot pick and choose from each list. It's all of one or all of the other. You can see the Texas exemptions here and the federal exemptions here.

When preparing to file your case, your attorney will determine which list of exemptions would be most beneficial. In very general terms, Texas exemptions are good for those with large amounts of equity in their homes and Federal exemptions are good for those with little or no equity, but large amounts of cash, or other goods that can use what is called the "wildcard" exemption. The wildcard exemption is an exemption of any property that wouldn't ordinarily be exempt by using what is left of the Federal homestead exemption.

Example: If a debtor has a home worth $250,000 but owes $245,000 on the mortgage secured by the home, and also has $5,000 in cash, it would be prudent to use the federal exemption list rather than Texas exemption. Under the Texas exemptions the home would be exempt, but the cash wouldn't be. Under the federal exemptions list, the home would be exempt ($5,000) as would the cash by using the remainder of the federal homestead exemption to exempt it.

Creditors

Simply put, a creditor is anyone you owe money to, whether it is a credit card company or uncle Bob, who loaned you $500 last year to rent the moving truck or your ex-wife, who you still owe child support. Every creditor, whether on your credit report or not, must be listed on your bankruptcy schedules.

341 Meeting of Creditors

Section 341(a) of the U.S. Bankruptcy Code requires the debtor to attend a meeting of creditors within 30-45 days of filing. It is rare that creditors appear at these meetings. Typically only the debtor, debtor's counsel, and the trustee appear. The trustee will ask a series of questions, a sample of which can be found below.

341 Meeting Questions
341 Meeting Questions

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Discharge

The goal of filing for bankruptcy protection under Chapter 7 is to obtain a discharge. The Discharge Order is an order of the Bankruptcy Court that releases the Debtor of any obligation to pay their debts, with some exceptions. Violation of the discharge order by a creditor can result in penalties, also known as sanctions, including fines and attorney's fees for the Debtor's counsel.

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