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What is Chapter 7 bankruptcy?

This article was prepared by Legal Aid of Northwest Texas and contains material from other resources as well. It contains a general overview of bankruptcy and is not a substitute for direct representation by an attorney.

How is Chapter 7 bankruptcy different from Chapter 13 bankruptcy?

Chapter 7 is a liquidation. Chapter 13 is a reorganization.

In Chapter 7, the trustee reviews the debtors’ papers to see if they have any assets to sell to repay their creditors. However, most basic things that people own can be protected from the trustee by using exemptions. So in most Chapter 7 cases for individuals (not businesses), nothing gets liquidated—they are no-asset cases.

Chapter 13 is a plan to repay creditors that the debtor proposes. The creditors and trustee can object to the proposed plan. The bankruptcy judge decides whether or not to approve (confirm) the plan.

Once the Chapter 13 plan is confirmed, the confirmed plan is binding on the debtor and creditors: Everyone is stuck with it. There is only one way to change the terms of the confirmed Chapter 13 plan. The debtor can file a motion asking the bankruptcy judge to allow the terms of the confirmed Chapter 13 plan to be amended. For example, the debtor might have changed jobs and makes less at the new job, thus needing to lower the amount of the Chapter 13 plan payment.

 

How long does a Chapter 7 bankruptcy case take?

A typical Chapter 7 takes about three months from start to finish.

What can a debtor do with secured debt under Chapter 7?

In a Chapter 7, the debtor must make decisions about his secured debts. Secured debts are those for which the creditors have collateral. Collateral is property that the creditor can take back if the debtor does not pay what is owed.

The three options for a Chapter 7 debtor as to his secured creditors are:

  • Redeem: Pay the creditor the value of the collateral in one lump sum within about 2.5 months of filing the bankruptcy;
  • Reaffirm: Voluntarily sign a separate agreement agreeing to continue making the usual loan payments during and after the case, or
  • Surrender: Give the collateral back to the creditor or allow the creditor to take it back, for example, repossess or foreclose.

Chapter 7 and unsecured debt

In Chapter 7, unsecured debts (no collateral) are discharged (eliminated) at the end of the case, unless they are “priority” or “non-dischargeable” debts like child support, recent income taxes, or student loans. If the debtor has debts for significant cash advances or luxury goods bought shortly before the bankruptcy was filed, the creditor can sue to stop those debts from being discharged.

Who can file Chapter 7?

Chapter 7, if filed by a person or a married couple, is only available to people whose income is below the median income for their state and family size. As of November 1, 2016, the median income for Texas debtors was $46,127 (1-person household), $60,935 (2-person household), $64,894 (3-person household), $75,885 (4-person household), and so on, with an additional $8,400/person added on for households of five or more.

How much does it cost to file a Chapter 7 bankruptcy case?

What if I can't afford the Chapter 7 bankruptcy filing fee?

If you are filing Chapter 7, and your income is less than 150% of the poverty level, you may qualify for a fee waiver. That means you would not have to pay the court filing fees. Tjhe bankruptcy courts update information about what 150% of the poverty level is; this link is up-to-date as of January 26, 2017.

To get a fee waiver in a Chapter 7 bankruptcy case, file an application for a fee waiver with the court. The form was simplified in 2015. It is available as a fillable form online. The fourth page of this document is called the Order on the Application to Have the Chapter 7 Filing Fee Waived. Fill it out, too, and check the box marked “granted."

If your application for a fee waiver is denied, the court will generally let you pay the filing fee in installments. Expect an initial down payment of $50–$75, and to pay off balance in three or four months. You can also apply to pay the filing fee in installments. As long as you can’t currently pay the full filing fee, the court is likely to grant an application to pay the filing fee in installments.