There are four main types of bankruptcy cases provided under the law:
- Chapter 7 is known as "straight" bankruptcy or "liquidation." It requires an individual to give up property which is not "exempt" under the law, so the property can be sold to pay creditors. Generally, those who file Chapter 7 keep all of their property except property which is very valuable or which is subject to a lien which they cannot avoid or afford to pay.
- Chapter 11 (known as reorganization) is used by businesses and a few individuals whose debts are very large.
- Chapter 12 is reserved for family farmers and fishermen.
- Chapter 13 is a type of "reorganization" used by individuals to pay all or a portion of their debts over a period of years using their current income.
Most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly.
Chapter 7 (Straight Bankruptcy)
In a bankruptcy case under Chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for "exempt" property, which the law allows you to keep. In most cases, all of your property will be exempt. In the relatively few consumer cases where there is non-exempt property, the property is sold, and the rusulting funds are used to pay your creditors.
If you want to keep property like a home or a car, but are behind on the payments on a mortgage or car loan, a Chapter 7 case probably will not be the right choice for you. That is because Chapter 7 bankruptcy generally does not eliminate or reorganize the rights of mortgage holders or auto loan creditors. If you fit this situation a Chapter 13 may be a more attractive alternative.
If your income is above the median family income in Texas, you may have to file a Chapter 13 case (The Texas median family income for a family of four in 2014 was $69,570 – this number is adjusted periodically). Higher-income consumers must fill out "means test" forms requiring detailed information about their income and expenses. If the forms show that they have a certain amount left over that could be paid to unsecured creditors, the bankruptcy court may decide that they can not file a Chapter 7 case, unless there are special circumstances.
Chapter 13 (Reorganization)
In a Chapter 13 case you file a "plan" showing how you will pay off some of your past-due and current debts over the next three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property--especially your home and vehicle--which might otherwise be lost, as long as you can make your plan payments. In many cases, Chapter 13 functions as a bill consolidation of secured debts.
You should consider filing a Chapter 13 plan if:
- you are behind on debt payments (such as house note or car note), but can catch up if given some time
- you have valuable property which is not exempt, but you can afford to pay creditors from your income over time
- you have secured debts with high interest rates which you cannot afford to pay.
You will need to have enough income in Chapter 13 to pay for your necessities and to keep up with the required payments as they come due.