Bankruptcy Information
Chapter 7
Under the US Bankruptcy Code, there are basically three chapters that a consumer debtor can file under. The first is Chapter 7, which pertains to liquidation of non-exempt assets. Liquidation refers to when assets are sold and reduced to cash proceeds, which are then paid out to unsecured creditors. Only non-exempt assets can be liquidated/sold. In Texas there are two exemption schemes, Texas exemptions and federal exemptions. Generally, homeowners with significant equity in their home use Texas exemptions, while renters/new home owners tend to use federal exemptions. Finally, Chapter 7 cases usually last between 90 to 120 days.
Chapter 13
The second is Chapter 13, which refers to the reorganization of debts as creditors will receive some sort of repayment on the debt owed to them. Accordingly, a payment plan is filed with the court and must be confirmed by the Judge. Chapter 13 cases usually last 60 months, but can end in as little as 36 months in certain circumstances. Further, there is a Chapter 13 Trustee, who oversees the case and takes a percentage of the monthly plan payment as a fee for services associated with paying creditors. Chapter 13 is for debtors who either do not qualify for Chapter 7 or have a secured debt they are trying to get current on.
Chapter 11
The third is Chapter 11, which refers to the reorganization of business debts. It is usually used by businesses such as Chrysler; however, individuals can technically file under Chapter 11 if their debts exceed the debt limit for a Chapter 13 or if they are trying to avoid having a Trustee intimately involved with the process. Of course, the fees associated with a Chapter 11 are often cost-prohibitive and are often so high that even small businesses find it difficult to successfully reorganize under Chapter 11.
Texas vs. Federal Exemptions
In Texas, there are two exemption schemes: state (Texas) and federal. The main reason debtors would choose Texas exemptions is if they had a lot of equity in their home or if they had annuities, life insurance proceeds, inherited IRAs, or some other asset specifically exempted under Texas law. Otherwise, the better option for most people is federal exemptions because there is a wild card exemption of roughly $14K that allows debtors to protect cash, stocks, bonds, refunds, etc.