Types of Bankruptcy

Most people filing for bankruptcy will want to file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy case, you file a petition asking the court to discharge your debts. The intent is to wipe out (discharge) your debts in exchange for giving up your property, except for “exempt” property which the law allows you to keep. In most cases, all of your property will be exempt. Property which is not exempt is sold, with the money distributed to creditors.

Means Test

In order to qualify for a Chapter 7 Bankruptcy, you must pass what is known as the means test. If your current monthly income is below the adjusted median income in Texas, you automatically pass the means test. Otherwise, you must pass a secondary means test that deducts expenses, such as vehicle loan payments and mortgage payments, to determine if you qualify. We can walk you through the calculation and determine if you are eligible for this type of bankruptcy.

Chapter 13 Bankruptcy (Reorganization)

In a Chapter 13 case, you file a plan that details how you will pay off some of your past-due and current debts over three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property — especially your home and car — which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.

You should consider filing a chapter 13 plan if you:

  • Own your home and are in danger of losing it because of money problems
  • Are behind on debt payments, but can catch up if given some time
  • Have valuable property which is not exempt, but you can afford with your income over time
You will need to have enough income during your chapter 13 case to pay for your necessities, and to keep up with required payments as they are due.

Debt Counseling (Non-Bankruptcy)

There are some approved agencies that offer debt management plans and consolidation. This is a plan to repay some or all of your debts, usually by sending the counseling agency a monthly payment. The agency then distributes the payment to your various creditors. While these types of plans can be beneficial to some debtors, for others, they can be disastrous. Many debtors enter into debt counseling to avoid filing for bankruptcy. However, if you can’t afford to make all your payments, or miss a payment, you may end up in bankruptcy anyway — after having already paid a counseling agency money to create the plan.

It is important to remember that while bankruptcy is not right for every debtor, it is also not necessarily to be avoided at all costs. In many cases, bankruptcy may actually be the best choice for you.