When advising clients on bankruptcy as a potential legal option, we often reassure clients “life happens.” Sudden changes in job status or other loss of income can quickly lead to an overwhelming debt burden. In some cases, this debt scenario requires the type of intervention that only bankruptcy courts can provide.
What Are the Different Types of Bankruptcies?
If you are considering bankruptcy as an option to get out of debt, the Law Offices of Kretzer and Volberding P.C. are here to help you. Our team of bankruptcy attorneys in Houston can help you identify the right type of bankruptcy to get the fresh start you need.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as “liquidation” bankruptcy. In a Chapter 7 action, a debtor must turn over all his or her assets to a bankruptcy trustee to liquidate the assets for the benefit of creditors.
Which bankruptcy is best to file when you have little-to-no assets available? As a practical matter, most Chapter 7 consumer bankruptcies are deemed “no asset” as all the assets either have little equity or are exempt under Texas or federal law. Both Texas and the U.S. government offer exemptions, and it is up to the filer to choose which set of exemptions they would like to apply. In this regard, Texas has some of the most sweeping laws for exemption of property from bankruptcy liquidation, including but not limited to the following:
Texas Homestead Exemption
Texas offers an unlimited homestead exemption in bankruptcy for a residence situated on 10 acres or less in a city, town, or village or 100 acres or less in the country (and up to 200 acres for families). If you sell your house, the proceeds of the sale are exempt for six months after the sale under applicable exemptions. (Tex. Prop. Code Ann. §§ 41.001, 41.002, 41.003 and the Texas Constitution, Article 16, §§ 50, 51).
Thus, in many scenarios, you can keep your home after filing for bankruptcy in Texas.
Texas Motor Vehicle Exemption
The Texas motor vehicle exemption is a generous one that allows you to exempt the entire value of one motor vehicle for each licensed household member. If you have a household member who doesn’t have a license, you can still exempt that vehicle if the unlicensed person relies on someone else to transport them using the vehicle, a highly useful exemption for the “family car” used to bring children or an elderly parent to and from their destinations. [Tex. Prop. Code Ann. § 41.002(a)(9].
Texas Personal Property Exemptions
The personal property you can exempt (things other than real estate) can be up valued at up to 100,000 for a family or $50,000 if you are a single adult without a family. For example, if all your personal property is worth $200,000, you can exempt only $100,000 of it if you are the head of household. The remaining $100,000 will be nonexempt.
Personal property is defined by Texas statute and can include: firearms [Tex. Prop. Code Ann. § 42.002 (a)(7)]; athletic and sporting equipment [Tex. Prop. Code Ann. § 42.002 (a)(8)]; home furnishings [Tex. Prop. Code Ann. § 42.002 (a)(1)]; jewelry [Tex. Prop. Code Ann. § 42.002 (a)(6)]; animals, both pets and livestock [Tex. Prop. Code Ann. § 42.002 (a)(10),(11)]; clothing and food [Tex. Prop. Code Ann. § 42.002 (a)(2),(5)]; burial plots (Tex. Prop. Code Ann. § 42.021); health aids like hearing aids and canes [Tex. Prop. Code Ann. § 42.001 (b)(2)]; and health savings accounts for medical expenses [Tex. Prop. Code Ann. § 42.021].
Pensions and Retirement Accounts
Most tax-exempt pensions and retirement accounts are exempt under both the Texas exemptions and the federal exemptions. Specifically, Texas provides that the following exemptions of pensions and retirement accounts: County and district employee retirement and pension benefits (Tex. Gov’t. Code Ann. § 811.006); ERISA-qualified government or church benefits (Tex. Prop. Code Ann. § 42.0021); Firefighter retirement and pension benefits; [Tex. Civ. Stat. Ann. Art. 6243e.1 (1.04), Tex. Civ. Stat. Ann. Art. 6243e (5), Tex. Civ. Stat. Ann. Art. 6243b (15), Tex. Civ. Stat. Ann. Art. 6243a-1 (8.03), Tex. Civ. Stat. Ann. Art. 6243e (5)]; Judges’ retirement and pension benefits (Tex. Gov’t. Code Ann. § 831.004); Law enforcement officers, firefighters, emergency medical personnel survivors benefits; (Tex. Gov’t. Code Ann. § 615.005); Municipal employees, elected officials, and state employees’ pension and retirement benefits [Tex. Gov’t. Code Ann. § 811.005, Tex. Civ. Stat. Ann. Art. 6243h (22)], Police officer pension and retirement benefits. [Tex. Civ. Stat. Ann. Art. 6243d-1 (17), Tex. Civ. Stat. Ann. Art. 6243b (15), Tex. Civ. Stat. Ann. Art. 6243a-1 (8.03), Tex. Civ. Stat. Ann. Art. 6243j (20)]; Retirement benefits to the extent they are tax-deferred (Tex. Prop. Code Ann. § 42.0021); and Teacher retirement and pension benefits (Tex. Gov’t. Code Ann. § 821.005).
These include Fraternal benefit society benefits (Tex. Ins. Code Ann. § 885.316); Life, health, accident, or annuity benefits, including any money, policy proceeds or cash value due to or paid to the beneficiary or insured (Tex. Ins. Code Ann. § 1108.051); Texas employee uniform group insurance (Tex. Ins. Code Ann. § 1551.011); Texas public school employees’ group insurance (Tex. Ins. Code Ann. § 1575.006); and Texas state college or university employee benefits (Tex. Ins. Code Ann. § 1601.008).
Overall, Chapter 7 bankruptcy has several desirable characteristics, including generally resolving within three to six months, not requiring a repayment plan, and discharging most debts (certain debts like student loans, child support payments, and taxes are considered “nondischargeable.” However, you may have taken a credit card or loan out to pay these debts prior to filing for bankruptcy, and if so, that debt can be discharged).
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a form of “reorganization” bankruptcy (more on this in Chapter 13, below) that is most often used by large businesses and corporations. Individuals can use Chapter 11 too, but it is often not a good fit for individual situations.
There is also a Chapter 12 bankruptcy, a sort of special “carve-out” in the bankruptcy code designed for fishers and farmers. Chapter 12 is designed to protect the livelihood of persons working in these specialized industries, in such ways as permitting higher debt limits and offering more options for restricting debt.
Chapter 13 Bankruptcy
What’s the best bankruptcy to file when you can feasibly pay part of your debt? For those who can afford to pay something to their creditors, Chapter 13, a form of “reorganization” bankruptcy which is formally called “Individual Debt Adjustment,” can provide relief. Chapter 13 essentially amounts to a repayment plan, but unlike private credit counseling repayment programs that require fees and interest, no negotiation occurs, and no interest accrues.
In fact, all unpaid balances remain fixed at the time of filing. The repayment plan, which is designed with the guidance of the bankruptcy trustee and your attorney, can also be used to pay tax debt, unlike in Chapter 7. The ability to have something to use to repay is critical to entry into a Chapter 13 program, which is known as “feasibility.”
Which Bankruptcy Chapter Is Right for Me?
Provided you are an individual or sole business proprietor, either Chapter 7 or Chapter 13 may be a good option to help you get a fresh start on debt that today seems overwhelming. We have compiled a comparison of the pros and cons of the different chapters of bankruptcy below:
|Chapter 7 Bankruptcy||Chapter 13 Bankruptcy|
|Also known as: Liquidation||Also known as: Reorganization|
|How It Works: Most debts are discharged. A significant amount of property is exempt under State of Texas exemption laws. Nonexempt property is sold to repay creditors.||How It Works: Most debts are repaid in in a reduced amount. The debtor only repays what they can, based on their disposable income. No property is liquidated.|
|Time Range: Three to six months from filing to discharge.||Time Range: Three to five years from filing, through the repayment plan to discharge of the remaining unsecured debts.|
|Income Threshold: Income earners over a certain amount will be ineligible.||Income Threshold: Income earning is essential to be able to engage in the Chapter 13 repayment plan.|
|Foreclosure: Chapter 7 can temporarily stop foreclosure, but unless you can catch up on your mortgage, the foreclosure will eventually resume.||Foreclosure: Chapter 13 can stop a foreclosure and you can make up past due mortgage payments as part of your repayment plan.|
|Who Is Eligible: Chapter 7 is available to those whose income is less than the median income, or those who can pass the “means test.” In Texas, the median income for an individual is $50,902.00; for a family of two is $66,899.00; for a family of three is $73,948.00; for a family of four is $86,259.00; and for a family of five is $95,259.00. For additional family sizes, visit: https://upsolve.org/tx/means-test/.||Who Is Eligible: Chapter 13 has no income requirement, but instead focuses on the amount of debt. The amount must be below $419,275 and secured debt below $1,257,850 to qualify.|
|Good Candidates for Chapter 7: Unemployed debtors with few assets; Unemployed homeowners having trouble paying their mortgage; Unemployed homeowners with significant equity||Good Candidates for Chapter 13: Unemployed homeowners with significant equity; Employed homeowners facing mortgage delinquency or pending foreclosure.|
Make the Most of Bankruptcy with Help from the Law Offices of Kretzer and Volberding P.C.
When you are trying to figure out whether or not to file for bankruptcy and which type of bankruptcy is best for you, you will need a lawyer with specific experience on bankruptcy in Texas and who has the right knowledge and resources to help you.
Contact us online today to discuss your unique case and discover which option best suits your needs.