September 20, 2017

Qualifying for a Chapter 7

When we evaluate a bankruptcy case to determine whether it qualifies for a Chapter 7, we first look at three major questions. We practice in Texas, but all three of the considerations below apply in every state. The only difference outside of Texas is that different exemptions apply, and that may change the answer to #2 a bit.

1. How much unsecured debt (credit card, medical, signature loans, personal lines of credit, etc.) does the debtor have?
It costs over $2,000 to file bankruptcy when you include all of the attorneys fees, filing fees, required classes, credit reports, etc. So, unless a debtor can discharge $10,000 or more, we generally don’t recommend filing bankruptcy.

2. Does the debtor have any non exempt property?
Exempt property is property that is exempt from levy by creditors. In other words, exempt property is property that can not be touched by creditors. Non- exempt property is anything you own that is NOT exempt. Thus, “non-exempt property” is the property that creditors CAN TAKE. If a debtor has a large amount of non exempt property, which will be taken if he files bankruptcy, then it is usually not advisable to file bankruptcy.

The determination of what is exempt and not exempt is complex. The first complexity is that some states are “choice states” and others are not.  Texas, where we practice,  is a choice state that allows you to choose between the state list and the federal list of exemptions.  Some states require you to use the state list, and other states require you to use the federal list.

Let me explain this “choice state” thing a bit further, using Texas as an example.  There is a list of exemptions in the Texas Property Code. And there is another list of exemptions in the Federal Bankruptcy Code. If they get sued in the ordinary course of life, outside of a bankruptcy context, Texans can only exempt the types of property listed in the Texas Property Code exemption list. However, a Texas resident who files bankruptcy gets to choose the Texas list or the Federal list.

Generally speaking, the Texas list is more generous (ex. unlimited homestead protection), but it contains no exemption for cash (which means the debtor has to have empty bank accounts on the filing date or lose his cash to the trustee) and the Texas exemptions also contain no “wild card exemption” (i.e. a kind of exemption that can be applied to anything up to a certain value limit).

The federal list is generally less generous than the Texas list, but contains approximately $10,000 per person of “wild card exemption” which can be applied to any kind of property, including cash.

So, choosing between the Texas list and the federal list is going to depend upon what assets the debtor has.  If he has a big house that is paid off (and thus he has a lot of equity in the house), he has to use Texas exemptions to protect his house.  If he has very little in the way of assets, he will probably use the federal list so that he can use wild card exemption on the cash in his bank account and avoid the hassle of having to schedule his bankruptcy filing for a certain date when he is out of money and before his next paycheck arrives.

3. What is your income level?
In order to file bankruptcy, a debtor must pass the Means Test. Generally speaking, your income can be at most 5-10% or so above the median income for your county and your household size. To give you an idea of what that means, the current Travis County, Texas (where Austin is located) median income for a household size of 1 is about $38,545, for a household size of 2 it is $54,908, for 3 it is $57,053, and for 4 it is $66,400. Keep in mind that if you are married and you and your spouse both work, then both of your incomes must be counted against this household median income level. As with everything to do with bankruptcy, the calculation of the Means Test is complex (certain deductions apply, and certain kinds of income such as Social Security are not counted). It is absolutely essential that you consult with an attorney before making any decisions.

The determination of whether someone qualifies for a Chapter 7 is a complex one and the above three factors are only the first level of analysis that we do.

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