Chapter 7 Bankruptcy - FAQ

A debtor is a person who owes someone else money. On the other hand, a creditor is someone who is owed money.

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A Chapter 7 bankruptcy is commonly referred to as a “liquidation” or “straight” bankruptcy. The purpose of chapter 7 bankruptcy is to permit the honest debtor the ability to discharge most of his obligations to his creditors while retaining sufficient assets to obtain a “fresh start”. A chapter 7 bankruptcy trustee is appointed to facilitate both the discharge of the debtor’s debts as well as the liquidation of all property in excess of the amount deemed necessary under the Bankruptcy Code for the debtor’s “fresh start”. The property deemed necessary for the debtor’s “fresh start” is commonly referred to as “exempt property”. The chapter 7 bankruptcy trustee may only liquidate the debtor’s non-exempt property. In exchange, the debtor is issued a chapter 7 discharge, freeing him of most (if not all) of his debt. Most debtors, especially in Texas, own only exempt property resulting in the chapter 7 bankruptcy trustee taking nothing. Such cases are commonly referred to as “no asset” cases.

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Almost any individual, partnership, or corporation can file a chapter 7 bankruptcy petition. The debtor must reside, have a domicile, a place of business, or property in the United States. This is not, however, to say that every chapter 7 debtor receives a discharge. Only individuals who have not been granted a discharge within six (6) years of the filing of a chapter 7 bankruptcy petition are entitled to a discharge. That means partnerships and corporations never receive a chapter 7 discharge.

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No, but the process is not as straight forward as you might believe. The wrong answer to a simple question (i.e. Do I need to list all of my creditors?) can lead to dire results such as the denial of your chapter 7 discharge (often the sole reason for filing). It is highly recommended that you retain competent legal representation.

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No. On the other hand, it is often a good idea because of the amount of joint debts. Moreover, under Texas law, debts incurred during the marriage are deemed to be community debts. As such, a spouse that does not sign loan documents may be found personally liable for such debts to the extent there may be recovery had against such spouse’s interest in any non-exempt community property assets. Latimer v. City National Bank of Colorado City, 715 S.W.2d 825, 827 (Tex. App. - Eastland 1986, no writ).

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Yes. Whether the debt is owed to a bank, a relative or a friend, all creditors must be listed. When you sign your chapter 7 bankruptcy schedules you are stating under penalty of perjury that all of your creditors have been listed. An intentional failure to list a creditor could result in a denial of your chapter 7 discharge. On the other hand, mistakes do happen, and in those instances you will usually be allowed to amend your schedules. Lastly, you should note that creditors that are not listed in your bankruptcy schedules are not discharged. In other words, their rights remain unaltered by the chapter 7 bankruptcy.

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A chapter 7 discharge is a release of a debtor from personal liability for certain debts. The discharge is basically a permanent injunction issued against the debtor’s creditors thereby preventing those creditors from taking any action against the debtor or the debtor’s property to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.

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Absolutely. The Bankruptcy Code contains no prohibition with respect to how you handle your financial affairs after the chapter 7 discharge. The chapter 7 discharge merely eliminates the legal obligation to pay the debt. You remain free to spend your money as you see fit, including the repayment of discharged debts.

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Most debtors who file a chapter 7 bankruptcy petition loose no property. Whether a debtor will retain all of his or her property depends upon the exemptions code selected as well as the nature and value of the property owned. Also note that secured creditors retain their interest in the collateral (house, car etc.) regardless of the chapter 7 bankruptcy. If you wish to retain such items you will be required to continue making payments to the secured creditor.

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An exemption is a state or federal statute which prevents creditors from taking certain property away from a debtor. The exemptions were created to ensure that all debtors, despite any monies owed to their creditors, retained certain essential assets such as a home or a car. Check out the “exemption” section of this website for more details.

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Most chapter 7 debtors can exempt everything they own. Some of the items a chapter 7 debtor may exempt, depending on the exemption statute selected, include: (1) homestead, (2) vehicles, (3) retirement accounts, (4) pensions, (5) sports equipment, (6) livestock, and (7) household goods. For a complete list of the exemptions available to chapter 7 debtors, as well as their respective limitations, you should view the “exemption” section of this website.

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The Bankruptcy Code requires every chapter 7 debtor to complete a set of bankruptcy schedules. These bankruptcy schedules require the debtor to list everything the debtor owns or has an interest in. The Bankruptcy Code further provides very harsh penalties, including the denial of the discharge, for any debtor intentionally omitting any items. In other words, the debtor, via the chapter 7 bankruptcy schedules, tells the Bankruptcy Court everything he or she owns.

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Yes. If you do not complete the chapter 7 bankruptcy schedules completely and accurately you will likely not receive a chapter 7 discharge and will subject yourself to fines and possible imprisonment.

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Yes. Section 362(a) of the Bankruptcy Code (the automatic stay provision) prevents creditors from taking any action to collect debts. The automatic stay also prevents secured creditors from foreclosing, seizing, and repossessing their collateral. Once a creditor learns of the chapter 7 bankruptcy filing, that creditor must immediately stop all collection efforts.

Creditors receive notice of the chapter 7 bankruptcy from the Bankruptcy Court based upon the information you provided in your bankruptcy schedules. The notification process will often take one or two weeks. In the interim, when a creditor calls you should advise them of the bankruptcy filing and provide them with the chapter 7 bankruptcy case number and the date the case was filed. Some cases, however, may require a more proactive approach. In that situation you or your attorney should contact the creditor immediately after filing the bankruptcy petition. Examples of situations requiring immediate notification include: (1) pending litigation, (2) possible repossession, or (3) possible foreclosure.

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Yes. However, a chapter 7 bankruptcy case will never permanently stop a creditor from foreclosing or repossessing their collateral. A secured lender, shortly after learning of the chapter 7 bankruptcy case, will likely file a motion with the Bankruptcy Court for permission to continue the foreclosure proceedings or repossession (a motion for relief from the automatic stay). If you wish to retain the collateral you will need to make arrangements with the secured creditor. Such an arrangement usually requires you to become current on the obligation in a relatively short time period.

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Yes. A secured creditor, upon learning of the chapter 7 bankruptcy case, has an affirmative duty to return the vehicle if the vehicle was not previously sold at auction and the value of the vehicle to the bankruptcy estate is inconsequential. Moreover, a secured creditor’s continued retention of a repossessed vehicle after learning of the chapter 7 bankruptcy case is a violation of the automatic stay. Nissan Motor Acceptance Corporation v. Baker, 239 B.R. 484, 487-488 (N.D.Tex 1999).

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The filing of a chapter 7 bankruptcy petition to stop an otherwise rightful eviction is not recommended. The landlord is entitled to possession of his property. Chances are, within days of learning of the chapter 7 bankruptcy case, the landlord will file a motion for relief from the automatic stay and request that the matter be heard on shortened notice. In such a case, you will likely gain little more than an additional week in the premises. Filing a Chapter 7 bankruptcy case for the sole purpose of avoiding an eviction constitutes an abuse of the bankruptcy process and may result in the dismissal of your bankruptcy case.

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A chapter 7 bankruptcy case will stop most civil lawsuits and IRS proceedings. On the other hand, a chapter 7 bankruptcy case will not usually stop divorce or criminal proceedings.

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Generally speaking, no. While there are some liens that can be removed under chapter 7 of the Bankruptcy Code (i.e. certain statutory liens, judicial liens and nonpossessory, nonpurchase-money liens) most secured creditors (typically those with liens upon your home and car) will retain their lien rights.

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A divorce does not prevent either spouse from filing bankruptcy. In fact, divorce is one of the primary reasons given by debtors for filing bankruptcy. If your spouse does elect to file for chapter 7 bankruptcy, you will need to seriously examine your financial condition. Chances are you and your spouse incurred numerous joint debts during the course of your marriage. Regardless of the terms of your divorce papers, you remain liable for those joint debts. As such, since your spouse’s creditors can no longer pursue him or her because a chapter 7 bankruptcy case, they will look to you for payment. Moreover, under Texas law, debts incurred during the marriage are deemed to be community debts. As such, a spouse that does not sign loan documents may be found personally liable for such debts to the extent there may be recovery had against such spouse’s interest in any non-exempt community property assets. Latimer v. City National Bank of Colorado City, 715 S.W.2d 825, 827 (Tex.App.--Eastland 1986, no writ).

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Generally speaking you must continue making alimony, maintenance and child support payments. As regards other financial terms of the divorce, the Bankruptcy Code provides that such payments are not dischargeable if the debtor has the ability to pay them and the detriment to the non-filing spouse outweighs the benefit of the discharge to the debtor. Such debts are, however, discharged if the non-filing spouse fails to timely commence a proceeding requesting that such debts not be discharged. If no such proceeding is commenced the debtor is not required to continue making payments.

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Generally speaking, students loans are not dischargeable under a chapter 7 bankruptcy case. Only if the repayment of the student loan represents an undue hardship to the debtor and the debtor’s dependents could a student loan be discharged.

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Maybe, maybe not. Taxes that are more than 3 years old are dischargeable. However, if you have employees and owe income tax on your employees’ earnings, those taxes are not dischargeable. Note that taxes not discharged in a Chapter 7 bankruptcy case can be paid over a period of three to five years through a chapter 13 plan.

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After filing a chapter 7 bankruptcy petition, a meeting of creditors (the 341(a) hearing) is scheduled before the chapter 7 bankruptcy trustee. The purpose of the meeting is to meet the debtor and ask questions of him or her. During this meeting creditors may be present and may ask questions of the debtor, though most do not. Typically, the meeting lasts less than fifteen minutes and takes place in an office of the federal courts building or some other meeting room. The meeting does not take place before a bankruptcy judge and is not located in a Bankruptcy Court. The meetings are generally scheduled within 30 days of a Chapter 7 bankruptcy filing, and within 45 days of a Chapter 13 bankruptcy filing. Your attorney will be present at this meeting with you. Other than the first meeting of creditors, you will likely have no other hearings.

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If you are considering filing for chapter 7 bankruptcy you should immediately stop using your credit cards. The continued use of any credit cards from this point forward could result in those debts not being discharged.

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No. It would be unethical for any consumer bankruptcy lawyer to accept payment by credit card knowing that such debt might be discharged through subterfuge. By agreeing to accept legal fees on a credit card, or indirectly from a cash advance obtained for paying a bankruptcy attorney, the bankruptcy attorney is participating in a fraud upon the Bankruptcy Court as well as upon the issuer of the credit card. Such debts are likely not dischargeable (cash advances and charges for luxury goods exceeding $1,150.00 are presumed to be nondischargeagble) and any effort to cloke the charge or cash advance constitutes fraud. This is perhaps best illustrated by the following hypothetical question: Would a credit card issuer, knowing that the credit card charge proceeds would be used to pay your bankruptcy attorney, authorize the charge? Of course not! Don’t do it.

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There is no easy answer to this question. Bankruptcy might be viable if:


If you fall into one of the above listed categories and are contemplating filing for bankruptcy protection, it is in your best interest to seek advice of a bankruptcy attorney who can evaluate your individual circumstances to determine which course of action is best for you.

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Yes. All events affecting your credit are recorded. That includes prompt payments, slow pays, charge-offs, and judgments as well as a bankruptcy filing. If you are currently contemplating bankruptcy, then it is likely that your current credit rating has already been negatively impacted.

A chapter 13 bankruptcy discharge will usually remain on a credit bureau for seven years, whereas a chapter 7 discharge will likely remain on a credit bureau for ten years. While record of your bankruptcy filing may be on your credit history for up to 10 years, the reality is that most people find they are able to completely rebuild their credit within 3 to 5 years. Depending upon the lender and the reason for incurring new debt, your ability to obtain credit will likely improve shortly after you receive your chapter 7 discharge. If for no other reason than the fact that your financial condition has been dramatically improved. However it is up to you to make sure you rebuild and maintain your credit rating. If you fail to make steady, regular payments on new or reaffirmed debts you will likely make a bad situation worse.

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A chapter 7 bankruptcy discharge will usually remain on your credit report for a period of ten years.

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No. First, you should note that although bankruptcy records are of public record, most employers will never learn of the bankruptcy unless you tell them. Second, if you owe money to your employer you will be required to list your employer as a creditor on your bankruptcy schedules. In so doing, they will learn of the bankruptcy filing from the Bankruptcy Court. Lastly, the Bankruptcy Code specifically prohibits any employer from discriminating against you because you filed a chapter 7 bankruptcy petition.

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Whether or not you will be able to keep any credit cards after the chapter 7 bankruptcy discharge is a matter between you and your credit card company. Most credit card companies will not allow you to retain a credit card if you discharged your debt to them. They will expect you to reaffirm the obligation before extending any further credit. It is never a good idea to pay for credit. If you need to use credit after your chapter 7 discharge for work or other reasons, you should consider a secured credit card.

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The advertisements you see respecting “zero down” bankruptcy are misleading and, in our opinion, unethical. Such adds lead you to believe you are receiving a benefit not offered by other lawyers. That is simply not the case. Attorneys advertising “zero down” bankruptcy will not perform any work until they are paid at least something and will not file your case until they have been paid their fee in full -- just like all other bankruptcy attorneys. Realize that almost all attorneys allow you to pay the retainer fee and the Bankruptcy Court filing fee in installments. The “zero down” bankruptcy advertisement is little more than a ploy to get you in the door and to sign their retainer agreement.

NOTE: Never retain a lawyer that is willing to file a chapter seven bankruptcy case and collect the fee from you later. That attorney is violating the discharge provisions of the Bankruptcy Code if any effort is ever made to collect that fee. The attorney fee was discharged along with all of your other debts. Further, to the extent the lawyer indicates the fee is for services rendered post-petition, the lawyer is again violating the tenets of the Bankruptcy Code. Lamie v. United States Trustee, 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004).

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This is an excellent question, and one I wish more people would ask. It is unfortunate, many people who take out debt consolidation loans to pay off credit card debt often lose their homes to foreclosure. You can never borrow your way out of debt. Robbing Peter to pay Paul solves nothing.

On the surface, a debt consolidation loan appears to be a good thing. The debt consolidation loan lowers the amount of payments due each month. The debt consolidation loan to eliminates large monthly credit card debt payments at a high rate of interest and replaces them with a substantially lower monthly payment at a reduced rate of interest. While this looks great, looks can be deceiving.

First, though the interest rate on a debt consolidation loan is lower than that on your credit cards, you will pay more in interest and finance charges over the life of the loan than you might realize because of the extended term. Second, you have converted an unsecured debt that could be wiped out in bankruptcy into a secured debt that cannot be wiped out in bankruptcy absent surrendering your home. Third, if the only way you are able to make the new lower payment on your debt consolidation loan is to continue using your credit cards (albeit to a lesser degree than before) you now risk foreclosure.

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