Bankruptcy Frequently Asked Questions

When might someone choose to file bankruptcy?

An individual might choose a bankruptcy when a life event, such as a job loss, divorce or medical emergency, causes a disruption in income or a complete lifestyle change. For a consumer, when income is disrupted, and debts can be repaid, a chapter 13 may be the best option to repay any home, vehicle or tax arrears over a period of 3 to 5 years. In other situations, such as when the mortgage has not fallen behind, or income is below average, a chapter 7 may be the best option. It is important to consult with a bankruptcy attorney since bankruptcy is extremely complex. Your circumstances may not fit neatly into the descriptions listed here.

What is a Bankruptcy Discharge?

In a consumer case, the goal of bankruptcy is to receive a bankruptcy discharge. A discharge is a Court Order stating dischargeable debts, such as medical bills, credit card debt, pay day loans, repossessions, charge-offs and other unsecured debts are no longer collectable. The creditor is barred by Court Order from making attempts to collect, and the discahrgeable debts will be noted as discharged on the client’s credit report. 

What is a Bankruptcy Reorganization?

In a consumer case, bankruptcy reorganization typically happens in the context of a Chapter 13. It is called a Chapter 13 Bankruptcy because Chapter 13 is the section under the Bankruptcy Code only available to consumer debtors. When a consumer reorganizes in a Chapter 13, the consumer proposes a Chapter 13 Plan Payment. As an example, the consumer client might propose a plan that would catch up back mortgage payments and repay IRS debt, but surrender an old car. In addition to the proposed treatment of secured creditors and government debt, the plan could propose to pay 0% to unsecured creditors if no funds or non-exempt assets are available. In this way, the consumer is reorganizing debts by repaying the secured debts he or she wants to keep, repaying government and priority debts and only repaying unsecured creditors if there is enough disposable income or non-exempt assets available for distribution.

What is a Bankruptcy Liquidation?

In a consumer case, bankruptcy liquidation means liquidating non-exempt assets for the benefit of creditors. This could happen under any chapter, but it is most common in a Chapter 7 Bankruptcy. Although Chapter 7 Bankruptcy is known for liquidation, this is unusual in a consumer case. Typically, all assets owned by a consumer are exempt and beyond the reach of creditors or the bankruptcy estate. In this case, the Chapter 7 Bankruptcy is very short, typically 3 to 5 months. Chapter 7 Bankruptcy is named after Chapter 7 of the Bankruptcy Code. Unlike a Chapter 13, which is restricted to consumers, businesses and consumers may file Chapter 7 Bankruptcy. However, Chapter 7 Bankruptcy contains other restrictions. For instance, since Chapter 7 is a liquidation bankruptcy and does not contain a plan payment, consumer clients interested in filing Chapter 7 must meet eligibility requirements. First, clients wishing to file Chapter 7 must meet certain filing requirements.  Clients can only file Chapter 7 Bankruptcy once every 8 years. Second, consumer clients must show they have below median income or that they have budget deductions to overcome the presumption of abuse.  However, a person with a majority of business debt may overcome the income requirement.  This is very helpful for small business owners who have signed personal guarantees for business debts. Upon completion of the case, the consumer client will receive a discharge. If a business chooses to file Chapter 7 Bankruptcy, the business is not eligible to claim exemptions nor is it eligible for a discharge. Despite this, many businesses choose to file Chapter 7 as a means to satisfy creditors.

How long will I be in bankruptcy?

The term of a bankruptcy depends on the chapter you have filed, your repayment plan and your current monthly income. If you have filed a chapter 7, your case is likely to last 3 to 5 months. In a chapter 13, the term is 36 to 60 months. In a chapter 7, the term is shorter because you are not proposing a repayment plan.

Do I make too much money to file bankruptcy?

Chapter 7 eligibility is partly determined by your income. However, chapter 13 eligibility is determined by the amount of your debt. Individuals and married couples may not use chapter 13 as a means to reorganize debts if their debts exceed the debt limit. The debt limit is an exact figure and is regularly updated, but to keep things simple, an individual or married couple is ineligible from chapter 13 if their unsecured debts are in excess of approximately $419,275 and their secured debts are in excess of approximately $1,257,850. An individual or married couple with debts in excess of these figures will need to use chapter 11 to reorganize debts. However, since married couples are not required to file together, it may be possible for married couples to file separate bankruptcy cases to avoid the debt limit.

Will I lose property if I file bankruptcy?

Only if you have non-exempt assets. Exempt assets are beyond the reach of your creditors. Non-exempt assets may be used to pay your debts. Since the exemption statutes are generous, most clients do not have any non-exempt assets. However, it is important to disclose all your assets.

What keeps creditors from repossessing assets during bankruptcy?

As soon as your bankruptcy case is filed, you will be given bankruptcy protections, called the automatic stay. This means your creditors are precluded from taking action against you while you are in the case unless they obtain court permission. As a result, your assets are protected because your property cannot be repossessed or foreclosed, your wages may not be garnished or seized, your creditors may not contact you or sue you while you are in the case unless the court has ordered otherwise. 

How do I rebuild my credit after bankruptcy?

As long as you complete the bankruptcy and follow the bankruptcy rules, you will receive a bankruptcy discharge. Discharge is the goal of bankruptcy. When you receive your discharge order, your discharged creditors cannot act to collect against you. Discharged debts may include credit cards, payday loans, medical bills, repossessions and charge offs. A bankruptcy will stay on your credit report for 8 to 10 years. However, most clients find their credit scores improve after their bankruptcy case is discharged. This is because many of their debts have been negatively reported. You can continue to rebuild your credit by paying your bills on time. Some companies offer to help you remove inaccuracies from your credit report, but you can do this on your own by writing to the company falsely reporting your debt and the credit reporting agencies.

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