Consumer Debts and Bankruptcy

As an individual with consumer debts, will I still be able to file bankruptcy?

Bankruptcy is still available to individuals; however, many individuals with consumer debts whose income is over the median average in their home state may have more difficulty obtaining a Chapter 7 discharge.

What is the eligibility standard?

In a case involving consumer debts, the bankruptcy trustee or any party may challenge an individual's eligibility for Chapter 7 if the debtor's current monthly income (defined in the Bankruptcy Code) is enough to pay a certain portion of the debtor's obligations over five years. Some refer to this formula as the "means test."

If the debtor's income is equal to or less than the debtor's home, state's median average income, you may still be eligible for Chapter 7. Thus, most debtors whose income falls below this median level should be able to stay in Chapter 7.

What happens if I fail the means test?

A presumption of "abuse" may apply, and the Chapter 7 can be dismissed or, with the debtor's consent, it can be converted to another chapter, typically Chapter 13.

Are there other mandatory steps to be taken? What about credit counseling?

Generally, an individual may or may not file bankruptcy without obtaining credit counseling from an approved nonprofit agency within 180 days before filing. Additionally, an individual debtor may not obtain a discharge until he or she has completed a personal financial management course.

May I still reaffirm and pay certain debts?

Reaffirmation of certain debts in Chapter 7 is still allowed; however, creditors will have to provide greater disclosure about the reaffirmed debt, and the debtor's lawyer may have to certify to the court that it does not cause an undue hardship.

If I file Chapter 13, may I still "cram down" the amount of my car loans?

In certain cases, a Chapter 13 debtor may no longer be able to divide a creditor's claim into secured and unsecured portions. If the creditor has mortgage secured by an automobile purchased within two and a half years (910 days) before bankruptcy (or in the case of other consumer goods purchased within one year before bankruptcy), the claim must be paid in full or the collateral surrendered. The pre-bankruptcy arrearage, or past due amount, may be cured in the plan.

May I still claim my Texas homestead?

The Texas homestead remains available for most debtors; however, a debtor generally needs to have lived in Texas for the two years (730 days) before bankruptcy in order to claim Texas exemptions. For debtors who have owned their Texas homestead for at least 1,215 days before filing, the homestead exemption remains unlimited; for others, however, there may be a $125,000 cap.

Are retirement accounts exempt?

Yes, and the new law clarifies that a qualified IRA up to $1 million plus certain eligible rollovers is exempt and excluded from the bankruptcy estate.

Adapted by Stephen J. Zayler from an article by Roger Cox in the Texas Bar Journal, Vol. 68, No. 8. Roger Cox is a shareholder with Sanders Baker, P.C. in Amarillo. He is board-certified in business bankruptcy law and is a member of the Council of the State Bar's Bankruptcy Section.