In order to qualify for debt relief through liquidation (cancellation of debt) under Chapter 7 of the Bankruptcy Code, you must be an individual, a partnership, or a corporation. 11 U.S.C. ©© 109(b) & 101(41). Relief is available under Chapter 7 regardless of the amount of your debts. The theory of Chapter 7 is that the Bankruptcy Court (through a Trustee) gathers and sells the Applicant's nonexempt assets and the Creditors of the Applicant receive a percentage distribution, in accordance with the Bankruptcy Code. As a practical matter, however, most individuals and families in Texas have no assets that are not exempt. If they did they would not be seeking debt relief by filing a Chapter 7 petition. In addition, under Chapter 7, the individual and family Applicant is permitted to retain "exempt" property. In Texas, almost all personal property is exempt. Federal exemptions are also available.

One of the primary purposes of bankruptcy is to "discharge" debts in order for the Applicant to have a fresh financial start. The discharge has the effect of extinguishing the Applicant's personal liability on all unsecured debts but allowing him or her to retain those debts that are secured, such as a home and vehicles.

How Chapter 7 Works

A Chapter 7 case begins with the Applicant filing a petition and numerous schedules with the bankruptcy court. These schedules include: assets and liabilities; statement of financial affairs; value of personal property; schedule of executory contracts and un-expired leases; environmental data; schedule of exempt assets; creditor matrix; list of all creditors and the amount and nature of debts; source, amount, and frequency of the Applicant's income; list of all of the Applicant's property; and detailed list of the Applicant's monthly living expenses.

The petition is filed with the Bankruptcy Clerk, who currently charges a $200.00 filing fee. The filing of a petition under Chapter 7 automatically "stays" or stops collection activities, telephone harassment and other aggressive conduct against the Applicant. 11 U.S.C. ©362. This stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors can neither begin nor continue any lawsuits or collection activities.

One of the schedules you must file is a schedule of "exempt" property. Federal bankruptcy law provides that an individual Applicant can protect certain property from the claims of creditors either because it is exempt under federal or State law. 11 U.S.C. ©522(b). Whether certain property is exempt and therefore available to be retained by the Applicant is often a complex and difficult question of either state or federal law. Legal counsel will help you determine these complex issues.

Generally, the only appearance of the Applicant is with counsel at a "meeting of creditors," which is held 30 to 60 days after the petition is filed. The Applicant must attend this meeting, at which creditors are invited to appear and ask questions regarding the Applicant's financial affairs and property. 11 U.S.C. ©343. If a husband and wife have filed a joint petition, they both must attend. The appointed Trustee presides over this meeting. The Applicant must cooperate with the Trustee and provide any financial records that the Trustee requests. The Trustee is required to examine the Applicant orally at the meeting to insure that the Applicant is aware of the potential consequences of seeking a discharge in bankruptcy, the option of filing a petition under a different Chapter, the effect of receiving a discharge, and the effect of reaffirming a debt.

The theory is that the Trustee assigned to administer the case will liquidate the Applicant's nonexempt assets and distribute the value pro rata to unsecured creditors. 11 U.S.C. ©© 701, 704. If, as is most often the case, all of the Applicant's assets are either exempt or subject to valid liens (such as home or autos) there is no distribution to unsecured creditors. Typically, most Chapter 7 cases involving individual Applicants are "no asset" cases. If the case appears to be an "asset" case at the outset, however, unsecured creditors who have claims against the Applicant must file their claims with the Clerk within specified time limits after the first date set for the meeting of creditors. Bankruptcy Rule 3002(c). Depending on individual circumstances, an Applicant wishing to keep possession of "secured" property, such as an automobile, may find it advantageous to "reaffirm" the debt. A "reaffirmation" is an agreement between the Applicant and the creditor that the Applicant will pay the money owed, even though the Applicant has filed bankruptcy. In return, the creditor promises that, as long as payments are made on time, the creditor will not seek to repossess the automobile. The reaffirmation should be accomplished prior to the granting of a discharge.

Discharge of Debt and a Fresh Financial Start

A "Discharge" releases the Applicant from personal liability for discharged debts and perpetually prevents creditors from taking any legal action to collect the debts. The bankruptcy law regarding the scope of a Chapter 7 discharge is complex cannot be explained at depth here. The discharge will usually be granted to a Chapter 7 Applicant within 60 to 90 days after the date first set for the meeting of creditors. Bankruptcy Rule 4004c. It is very important that you retain this "Discharge" for at least 10 years.

The grounds for denying an individual Applicant a discharge in a Chapter 7 case are narrow and are construed against a creditor seeking to deny the Applicant a Chapter 7 discharge. Among the grounds for denying a discharge to a Chapter 7 Applicant are: that the Applicant failed to produce requested financial records; the Applicant failed to explain satisfactorily any loss of assets; the Applicant committed a bankruptcy crime such as perjury; the Applicant failed to obey a lawful order of the bankruptcy court; or the Applicant fraudulently transferred, concealed, or destroyed property that would have become property of the estate. 11 U.S.C. ©727; Bankruptcy Rule 4005. An Applicant cannot discharge specific types of debts listed in © 523 of the Bankruptcy Code. Among the types of debts that cannot be discharged in a Chapter 7 case are child support, certain taxes and student loans. The Applicant is still responsible for these debts after the bankruptcy case has concluded. 

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Frank Waltermire is not currently certified in any specialty but was formerly Board Certified in Civil Trial Law with the Texas Board of Legal Specialization from 1984-2004.  Please email questions or comments about this web site to frank@greaterhoustonbankruptcy.com.  Copyright © 2003 , Frank Waltermire. All rights reserved.