Chapter 7
Chapter 7 is commonly called the “straight” bankruptcy. It is used by individuals to get a “fresh start”. A trustee is appointed in a chapter 7 whose task it is to gather the debtor’s non-exempt assets and sell them to pay (sometimes) a portion of the creditors’ claims. The vast majority of cases do not have any property sold as Texas Exemptions are very broad and cover most property owned by a debtor and federal exemptions are also liberal in that regard. Businesses that wish to liquidate and terminate their operations also can use Chapter 7 to close up shop. Partnerships can also use Chapter 7 for debt relief.
The Trustee reviews a consumer debtor’s budget as is set forth in a document referred to as a Means Testing form. A consumer case is one where the majority of your debts are consumer in nature(Credit cards, medical bills, house and car debts).The “Means Testing” form analyzes your budget based on congressionally determined guidelines to ensure that you don’t have any money left over in your budget to pay on the debts that you are seeking to discharge. Most consumers still qualify for chapter 7 relief in spite of what you may have heard from other sources like debt collectors. Those debtors whose debts consist of a majority of business debts do not have to subject themselves to the “Means Testing” calculation. IRS taxes and business personal guaranties are not considered consumer debts for these purposes. Also if you used your credit cards to help fund your business, they can also be counted as business debts even if they are in your personal name.
Bankruptcy is about giving the debtor a “fresh financial start.” Individual debtors can receive a discharge in Chapter 7. This will ordinarily wipe out the debtor’s personal liability on what are known as dischargeable debts. A discharge is not absolutely certain and will not extinguish a lien on property, which means an IRS lien will survive a chapter 7 discharge. Certain debts are not dischargeable such as student loans, certain income and all payroll taxes and certain debts obtained by fraud. You should consult with me to be properly advised on the issues of different types of debt.