Chapter 7 Bankruptcy -Dallas, Texas

Chapter 7 Bankruptcy is titled “Liquidation”. Basically when you file for Chapter 7 Bankruptcy, your assets (at least “in theory”) are turned over to a bankruptcy trustee who then distributes them out to your creditors. In exchange for this, you get a discharge on certain debts, which means you are no longer under a legal obligation to pay those debts. If this was all that is understood about Chapter 7 Bankruptcy, you might think that it doesn’t sound like a very good option. (After all, if you have to give up your assets, such as your house, in order to get the discharge, then what is the advantage?) The law allows you to keep some of your assets when you file for Chapter 7 Bankruptcy. (Which assets you get to keep largely depends on what state you live in. I will assume here that we are talking about Chapter 7 Bankruptcy in Texas, because that is where I live.) The reason I say that you must give up your assets “in theory” when in Chapter 7 Bankruptcy is because a significant number of people will find that almost all of their assets are “exempt” under Texas law, so they will get to keep them by claiming state exemptions. (See Schedule C – “Property Claimed as Exempt”, and 11USC Section 522(b)(3), and Texas Property Code, especially Texas Property Code Sec. 41.001, 42.001, 42.002, and 42.0021.) For instance, many people in Texas will find that their house is homesteaded and that they can keep it in Chapter 7 Bankruptcy, assuming that they are still current on any mortgage or other debts secured by the house, but beware that recent changes in the Bankruptcy law have capped this exemption for some people recently moving to the state. (See 11 USC Section 522(p).) If you don’t own your home, you also might be better off claiming the Federal exemptions found in the Bankruptcy code. (See 11 USC Sec. 522(b)(2), 522(d)(1), and 522(d)(5) –Note that (d)(5), the “wildcard exemption”, would allow a renter to take a portion of the home ownership exemption found in (d)(1) to apply to any property that they own.) Whether to take the Federal or State exemptions, like everything, depends on your situation.

The basic bankruptcy process will work like this: (This is just a general outline, and you should consult with a lawyer for details.) First, you will need to take a credit counseling class, which should be available online from several sources . (See 11 USC Sec. 109(h) You will receive a certificate, which must be filed at the bankruptcy court. (Note that you must also take another “financial education class”, prior to receiving your discharge in Bankruptcy.)

After you get your certificate from the credit counseling class, you prepare the petition, schedules, and associated forms and file them with the proper bankruptcy court. File the credit counseling certificate with the court as well. The proper court to file in depends on where you live. In the Dallas area, this will probably either be the Northern District of Texas Bankruptcy Court or the Eastern District of Texas Bankruptcy Court. Forms for the petition and schedules that you must file are available at either court’s web site. Fill out all of the required information for your particular situation on the petition, forms, and schedules and file it with the court. You must also prepare and file a creditor’s matrix, which lists all of your creditors and their addresses, so that they can receive notice of the bankruptcy filing. The format of the creditor’s matrix usually depends on the court you are in, so check the web site of the particular court your are filing in. (Also, lawyers use electronic filing over the Internet, so I am uncertain whether the courts even take paper filings anymore. Call the clerk and ask whether you must file in an electronic format, or look on the court’s web site for details on pro se filing if you are doing it yourself.)

After you have filed all of the proper documents with the court, you will receive a notice for the “meeting of creditors”. Attorneys sometimes call this the “341 meeting”, because it is required under Section 341 of the bankruptcy code. A date, time, and location should be on the notice. You need to appear at this meeting, and you will be asked questions by the trustee and by any creditors who choose to attend. (In the typical “consumer debtor” case, i.e., your unsecured debts are mostly credit card debts, the creditors probably won’t bother showing up.) (Note that if you are a creditor, and receive notice that someone who owes you money has filed for Bankruptcy, then you have the right to attend the 341 meeting of creditors and ask questions of the debtor. As a creditor, you have other rights, including the possibility of getting a portion of any non-exempt property that the trustee collects.) Prior to the meeting date, you should call the trustee whose name and number appears on the notice, say you are representing yourself, and ask what records you are required to bring or send to the trustee in advance. For instance, you are required to provide and/or file your Federal income tax return, for the most recent tax year, within a specified time prior to the meeting. (See 11 USC Sec. 521(e)(2)(A)(i).) You must also provide income records for the 60 days prior to filing (these are typically pay stubs). (See 11 USC Sec. 521(a)(1)(B)(iv).)

After filing the petition, you will want to take the second course that was mentioned earlier. This is called something like the “pre-discharge financial management course”, and should also be available online. (See 11 USC Section 727(a)(11).) This certificate of completion also needs to be filed with the court. (Don’t assume that this is all that you have to do. You should consult 11 USC Section 521 regarding all of your duties as a debtor –as well as the rest of the bankruptcy code-, and make sure that you comply with all of them.)

Assuming that all goes well, then you would receive an order of discharge, which means you are no longer under a legal obligation to pay certain debts listed in the bankruptcy code, and other applicable law. (This typically will mean no further obligation to pay credit card debts.) Section 523 lists exceptions to discharge. These will probably come into play if things don’t go well for you. For the average consumer debtor, the most likely exception to discharge would be under Section 523(a)(2). This would include loans obtained by means of “fraud”. For instance, obtaining a loan with the intention of never paying it back, at the time that you get the loan, would likely be considered fraud, which would be an exception to discharge.

Before an exception to discharge of a debt will be found under Section 523(a)(2)(A), the creditor will have to prove this in an “adversary proceeding” in the bankruptcy court. The courts have defined the elements that the creditor must prove under 11 USC Section 523(a)(2)(A). In Texas these are: (1) that the debtor made a representation; (2) that the debtor knew the representation was false; (3) that the representation was made with the intent to deceive the creditor; (4) that the creditor actually and justifiably relied on the representation; and (5) that the creditor sustained a loss as a proximate result of its reliance. (See GE v. Guilford 406 F.3d 367, 372 (5th Cir. 2005).) (The attitude of most credit card companies and their lawyers sometimes seems to be that anybody who files for Chapter 7 acted fraudulently –this is probably because it is in their financial interest to use these exceptions to discharge as a means to eviscerate Chapter 7 Bankruptcy law through the court system. They will, of course, deny this.)

Such an adversary proceeding to determine dischargeability of a debt will be instituted by the creditor by filing a complaint alleging an exception to discharge under a specific statute, such as 11 USC Section 523(a)(2)(A). The adversary proceeding should be thought of as a separate lawsuit, to which you must file an answer and/or pre-answer filing, in accordance with the Federal Rules of Bankruptcy Procedure and the applicable Federal Rules of Civil Procedure. You must also engage in discovery, motion practice, and eventually have a trial regarding the matter. It will be time consuming, and you should familiarize yourself with all of the rules of procedure, and the local rules of the court. You will also need to familiarize yourself with the particular statute under which they are claiming an exception to discharge, and with the case law interpreting that statute. (Expect the creditor’s attorney to try to take advantage of the fact that you are not a lawyer.) Having a lawyer from the beginning is a good idea, but now you should really reconsider your decision to represent yourself, and retain a lawyer.