Chapter 7 vs. Chapter 13

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Filing Chapter 7 vs. Chapter 13 Bankruptcy in HOUSTON, TEXAS

Chapter 7 vs. Chapter 13 bankruptcy in Texas; which one to file? Our bankruptcy attorney in Houston offer information regarding the liquidation of non-exempt assets and eligibility criterion for the means test that will help you with the bankruptcy process. Is it better to consolidate with a mortgage loan? Should I consolidate my credit card debt with a non-profit entity such as consumer credit counseling services? Busby & Associates can help you with these questions as well.

A Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, a debtor is trying to get rid of as much debt as possible. Firstly, certain types of debt are not eliminated in a bankruptcy, i.e. student loans, child support, death or injury caused while driving under the influence of alcohol or drugs, recent taxes to the Federal and State governments, criminal fines, etc are not dischargeable under Chapter 7. Some debt may not be eliminated though they require specific actions by the creditor. As an example, recent credit card usage may not be eliminated by the bankruptcy if the creditor files an Adversary (a lawsuit filed within the bankruptcy) against the debtor and obtains an order declaring it non-dischargeable. A debtor may also elect to reaffirm some debt that would otherwise be discharged by the bankruptcy such as car loans or other secured debt, co-signed debt, etc.

One of the primary considerations in filing a Chapter 7 bankruptcy is related to those non-exempt assets that the debtor may have to forfeit to the Trustee. Non-exempt assets can include equity in real estate or automobiles, personal injury lawsuits, cash on hand, inheritances, etc. Upon filing of a Chapter 7 bankruptcy, a Chapter 7 Trustee is appointed to oversee the case for the purpose of liquidating non-exempt assets and making certain that the debtor has complied with certain specific requirements ordered by the court. The equity of assets, which can be exempted, or shielded, from the Chapter 7 Trustee, is listed in our section on Bankruptcy Exemptions.

You may obtain a discharge in chapter 7 bankruptcy once every 8 years. It is also possible to convert a chapter 13 bankruptcy to chapter 7 if you have not received a chapter 7 bankruptcy discharge in the 8 years prior to filing the original chapter 13 and not the date of conversion from 13 to 7.

Private Consolidation v. Chapter 13 Bankruptcy

How is Chapter 13 bankruptcy different from a private “debt consolidation service”?

In a Chapter 13 case, the bankruptcy court can provide aid to the debtor that private debt consolidation service cannot. For example, the court has the authority to prohibit creditors from attaching or foreclosing on the debtor’s property, to force unsecured creditors to accept a chapter 13 plan that pays only a portion of their claims and to discharge a debtor from unpaid portions of the debts. Private debt consolidation services have none of these powers. Also, your creditors in chapter 13 must file a claim to get paid and it must be in the proper form. Your duty is to give our firm the correct addresses of all the creditors so that we can put them on notice that you have filed for the bankruptcy. They then have up to 90 days after the meeting of creditors to file the claim. If they fail to attach any supporting documentation to the claim then their claim may be denied. If they fail to file a claim and they were served proper notice from you, then they get paid nothing and you still got to discharge the debt. You can also object if the claim is unenforceable in the state court i.e., the debt is more than 4 years old.

Is it better to consolidate my bills with a second (or third) mortgage instead of filing bankruptcy?

This mortgage is also known as home equity loan. Robbing Peter to pay Paul generally results in the inevitable, which is filing bankruptcy. This may initially sound appealing but you must keep in mind that in the process you will be losing some of your homestead protection in order to save your credit. Before closing on a home equity loan it would be wise to consult with a bankruptcy attorney and discuss the Texas Exemptions. I WOULD ALWAYS ADVISE AGAINST OBTAINING A HOME LOAN TO PAY CREDIT CARDS IN TEXAS. PLEASE CALL ME ON MY DIRECT LINE AT (832) 485-1375, IF YOU ARE CONSIDERING TAKING OUT A HOME LOAN TO PAY CREDIT CARDS.

Should I borrow on my retirement account to pay my creditors?

Qualified retirement accounts are exempted in a bankruptcy. Therefore, to borrow against it to pay otherwise dischargeable debts may not be in your best interest. The non-payment of the loan is treated as an early withdrawal which can result in tax penalties. Like taking a mortgage on your house to pay bills, loans on your retirement account is not recommended because the creditors that could have been discharged in a bankruptcy are been paid and the debtor has to either repay the loan or take the tax consequences. AGAIN PLEASE CALL ME AT (832) 485-1375 BEFORE YOU TAKE THE LOAN.

How will bankruptcy affect my credit?

Bankruptcy is always a last resort. This firm has never filed a bankruptcy case for a client if he or she had other options that could avoid it. As in all things, there are consequences for actions here too. When bankruptcy is your only alternative, you will have to accept the bad (e.g., another adverse notation on your credit report) with the good (e.g., immediate relief from your creditors, a fresh start, etc.). Comment: In most cases, another bad mark on your credit report will not make much of a difference.

Your credit rating during and after your bankruptcy will be the same with the exception that the bankruptcy will be listed in the report. How the bankruptcy will affect your ability to gain credit will be subject to the personal opinion of any credit grantor who looks at your credit report. A credit rating is a record of all your past credit performances. This record is made available to the creditors and they make up their own mind, following their own standards, as to whether or not they should grant you the credit. Instances of lawsuits, collections done, attachments, straight Chapter 7 and Chapter 13 bankruptcies etc. are indications, in one form or another, of credit problems.

Generally, it may take two years to reestablish your credit, three if you have surrendered your house and trying to buy one. You will have to work on rebuilding your credit. When you weigh the benefits of the discharge with the inability to get credit, I have found that discharge of debts which results in the elimination of the legal obligation to repay the debts has always prove beneficial for most households that are able to garner disposable income gradually as they no longer have to borrow from one creditor to pay the other and in turn don’t struggle to pay bills at the end of the month.

Finally, it is generally agreed that bankruptcy does not carry the same stigma that it once did. Nearly everyone knows someone who has filed for bankruptcy relief.

How long will the bankruptcy stay on my credit report?

Up to ten years, but bad credit stays on your credit report seven years from each report of activity (repossession, judgment, charge off, etc.) or late payment (past due 30, 60, 90, 120, etc). In other words, the seven years keeps starting over and over again every time something negative is reported.

What will my credit report look like after I receive a discharge?

After you receive your discharge, you should get a copy of your credit report. Compare your credit report to the creditors who are listed in your bankruptcy lawsuit. Make sure that each creditor has listed his/her debt as “discharged under bankruptcy protection,” or words to that same effect. If the debt is still listed as delinquent, in collection, or charged off, you will need to contact the creditor. Make a copy of your bankruptcy Petition, Schedules D, E, and F, and your discharge, and mail them with a cover letter to the Credit Bureau. While the bureau may report you having the account at one time, the balance should be zero on the report to the creditor, if you discharged it in under bankruptcy.

Can I lose my job or be demoted because of the bankruptcy?

An employer may not discriminate against any employee who is a debtor in a bankruptcy case. Nor can an employer terminate the individual’s employment if such treatment is based solely upon the debtor’s filing of bankruptcy. This is the black letter law. If your employer is going to fire you because you filed for bankruptcy then he/she will not directly tell you that and will look for other excuses to avoid a lawsuit. It is best not to advertise you filed and received a discharge unless of course a creditor is calling you or your employer trying to collect on the discharged debt, in which case you will need to see us about a suit against the creditor.

Will I be able to get student loan?

The Bankruptcy Code provides that you may not be discriminated against when applying for student loans. Although I have read that the student loan authority has a procedure that they do not lend money to debtors immediately after the discharge. In chapter 13 you are not allowed to incur debt without getting court permission. Most judges are going to prohibit you from incurring debt unless it is for transportation or some other necessary situation. Finishing your education may be considered necessary under certain circumstances. Thus, it is not wise to file a chapter 13 in Houston, Texas when financing your education through a student loan. A chapter 7 bankruptcy would be the better route and you may have to get a co-signer on the loan. Many lawyers will cite the bankruptcy code and tell you not to worry about it. It is true that a statute trumps the student loan authority procedure, but other courts have held that student loan authority can deny approval on the loan at the time of writing this page.  I am aware of one bankruptcy case in the Houston division where loan was disapproved and did not follow that approach and the court awarded damages to the student who was refused financing by the student loan authority.

Means Testing

Beginning October 17, 2005 about 20% of debtors in chapter 7 or Chapter 13 Bankruptcy will be required to submit the means test.

Being subject to the means test does not mean you cannot file for chapter 13 bankruptcy. It means that there are more forms for you to fill out and that you may not be able to file a chapter 7 bankruptcy. If you do not qualify for chapter 7 because of high income, please consider chapter 13 bankruptcy as an alternative to private consolidation. Our section on Chapter 13 bankruptcy v. Private Consolation details the benefits of Chapter 13. For Further information on the means test I encourage you to visit the U.S. Trustee website at www.usdoj.gov/ust

To summarize the means test, if your household income is below a certain threshold, then you pass the means test.  I have a means test program here.  If you would like to check for your own means test, then you are welcome to use our program.

If you are above this threshold then we will have to look much more closely at your case to see if we can file a chapter 7 for you. If you are above the median income and you fail the means test then a Chapter 13 bankruptcy is an option you may still have. In a chapter 13 bankruptcy, if you are above the median income then the commitment period is automatically 5 years. Certain household expenses are determined pursuant to I.R.S. standards. Other expenses you will get the actual monthly expense instead of the I.R.S. allowance. Most of the times, you can stop interest and penalties on unsecured debt. You will pay a percentage of your unsecured debt which may be as little as a penny on the dollar or as high as a dollar for dollar.

This is the case in all chapter 13 bankruptcies whether or not you submit to the means test. Chapter 13 bankruptcy is way out for those debtors who are above the means test & have a large amount of unsecured debt such that they aren’t eligible for filing under Chapter 7. If the debtor then decides to file Chapter 13 then the commitment period is five years and some of your expenses which may have been reasonable will no longer be allowed.