There are two types of consumer bankruptcy. Chapter 7 is what most people think of when they hear the word bankruptcy. Chapter 7 allows a debtor to discharge debt, which means that they are no longer responsible for payment to the creditors affected by the discharge. In return the debtor turns over all of her nonexempt property to a trustee who liquidates the assets and pays the proceeds to the creditors listed in the bankruptcy petition. There is very little liquidation in Texas, Chapter 7 cases because we have very good exemptions here, which are laws that protect property from creditors. For more on exemptions take a look at my other articles on the subject.
The second type of consumer bankruptcy is Chapter 13. This type of case is usually filed for one of two reasons. The first reason is because the debtor is not eligible for relief under Chapter 7 because they earn too much money. Chapter 7 bankruptcy is reserved for people without the ability to pay their debts. Debtors who have disposable income are required to file Chapter 13 bankruptcy which may require partial or full repayment of the unsecured creditors listed in the schedules.
The second reason for filing under Chapter 13 is to protect the debtor’s secured property from repossession or foreclosure. When a debtor is behind on her mortgage payments and her home is in danger of being foreclosed, she can file Chapter 13 bankruptcy and repay her mortgage arrears through a reorganization plan. The bankruptcy filing puts into effect an automatic stay which prevents foreclosure of the property and provides a way for the debtor to get caught up on her mortgage.
Chapter 13 bankruptcy has many other uses, such as reducing the payoff amount of debts secured by personal property, reducing interest rates on secured debt, extending the time to pay off debt, and stopping wage garnishments and lawsuits. For more information about filing bankruptcy in your area, contact a local attorney to discuss your specific financial situation.