Originally published: August 6, 2014 -- Updated: February 22, 2022

UPDATE: As discussed below, there are a variety of negative emotions that are associated with bankruptcy, and in some cases, these may lead people to take inadvisable actions or engage in behavior that will affect their ability to maintain financial stability. However, some of these negative emotions may be avoided by understanding the purposes of bankruptcy and the reasons why people seek relief from their debts. By working to eliminate the stigma associated with bankruptcy, people can approach this process in a more positive manner.

It is important to remember that bankruptcy is a right that is afforded to people in the United States, ensuring that they can receive a fresh financial start if they are in a difficult situation. Filing for bankruptcy does not necessarily mean that a person has been financially irresponsible or that they are to blame for the problems they are experiencing. In fact, most people who file for bankruptcy do so because of circumstances that are out of their control. The unexpected loss of a job, health issues that prevent a person from earning an income, or large medical bills are all issues that can put someone in a difficult financial position and make it impossible to repay their debts. In these cases, bankruptcy can relieve a person and their family from a financial burden that they could not have avoided. Taking advantage of the laws to receive relief from debts should not be an issue that reflects on a person’s character.

If you have significant debts, you may be considering bankruptcy to wipe out some or all of what you owe, providing you with a fresh financial start. However, you may be concerned that you will have to give up some of your money or property during the bankruptcy process. By understanding how different types of bankruptcy address this issue and the type of assets that may be exempt, you can determine your best options and ensure that you will be positioned for success once your bankruptcy is complete.

Liquidation of Assets in Chapter 7 Bankruptcy

For many people, Chapter 7 bankruptcy may be the best option for debt relief, since it will allow for the discharge of many types of debts. However, it may require you to turn over certain assets. This is known as liquidation, since the assets that you turn over will be sold, and your creditors will receive payments for some of what you owe. Fortunately, the law provides a number of exemptions from liquidation, meaning that you will be able to maintain ownership of a significant portion of your assets.

If you own a home, a “homestead exemption” will apply, and the equity you own will not be liquidated during a Chapter 7 bankruptcy. While some states limit the amount that can be exempted, Texas allows for an unlimited homestead exemption, as long as an urban home is on a property of no more than 10 acres or a rural home is on a property of no more than 200 acres. However, even though your home may not be liquidated during bankruptcy, if you choose to discharge your mortgage loan, your lender may foreclose on the property and repossess the home. You may be able to avoid the loss of your home by using Chapter 7 to discharge other debts while making sure you are current on your mortgage payments and continue to make ongoing payments after completing the bankruptcy process.

Most people have debts of some sort. Certain types of debts may be necessary to own a home or vehicle, and other debts may be used to make purchases or receive education or medical treatment. While debts may be manageable for many people, there are situations where they can cause significant financial difficulty, especially if a person or family encounters issues that affect their income and ability to make payments. In these cases, bankruptcy may be an option that will allow for the elimination of debts. However, those who are looking to receive debt relief will need to understand how different types of debts are classified and how the type of bankruptcy they pursue will affect the debts they owe.

Addressing Secured and Unsecured Debts Through Chapter 7 or Chapter 13 Bankruptcy

Debts generally fall into one of two categories:

• Secured debts - These debts require a person to put up certain property or assets as collateral, providing security for the lender. If the borrower defaults on these debts, the lender may take possession of the collateral to ensure that they will be repaid for the amount of the loan. In many cases, collateral will be the property a loan was used to purchase, such as a home or vehicle. However, a person may use their assets as collateral in other debts, such as by securing a business loan with the equity they own in their home.

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If you are a homeowner who is experiencing financial difficulties, the possibility of foreclosure is likely one of your largest concerns. If you default on your mortgage, your lender may begin foreclosure proceedings, and if you do not make up the missed payments, you could lose ownership of your home. Fortunately, there are multiple options available that may provide you with debt relief, including filing for bankruptcy. With the help of an attorney, you can determine the best way to proceed, and you can take steps to prevent foreclosure while regaining financial stability.

Addressing Foreclosure Through Chapter 7 or Chapter 13 Bankruptcy

The first thing to understand is that filing for bankruptcy will allow you to stop foreclosure proceedings. After a bankruptcy petition is filed, an automatic stay will be put in place that prevents creditors from taking any actions to enforce your obligations, including proceeding with lawsuits to recover debts, repossessing property, or foreclosing on your home. Taking action to file for bankruptcy as soon as you are aware of foreclosure proceedings will make sure you can address your debts and determine the best course of action to receive relief.

When you file for bankruptcy, you will have two options: Chapter 7 or Chapter 13. Chapter 7 will allow you to eliminate certain types of debts. While this is usually the best option for dealing with unsecured debts such as credit cards, discharging secured debts such as a home mortgage or auto loan will usually result in the loss of the property the debt was used to obtain. That is, if you choose to discharge your mortgage, your lender will be able to take possession of the property and evict you. If you choose not to include your mortgage in a Chapter 7 bankruptcy, you may be able to discharge other types of debts, freeing up money that will allow you to become current on your mortgage and continue making payments. However, when filing for Chapter 7, you may be required to turn over certain non-exempt assets. Fortunately, Texas provides an unlimited homestead exemption in most cases, meaning that the equity you own in your home will not be subject to liquidation in a Chapter 7 bankruptcy.

When a person is determining their options for receiving relief from their debts and getting a fresh financial start, they may pursue one of two possible methods of filing for bankruptcy. While Chapter 7 bankruptcy is often the preferred method, since it will allow for the elimination of many different types of debts within a few months, this option is not always available. If a person does not qualify for Chapter 7, or if they wish to maintain ownership of their home or other assets, they may opt for a Chapter 13 bankruptcy. During the bankruptcy process, there are a variety of situations where a person who had originally planned to pursue a Chapter 13 bankruptcy may decide to convert their case to a Chapter 7 bankruptcy. Understanding when this is possible will help a debtor make the best use of the available options for receiving relief from their debts.

Reasons for Conversion From Chapter 13 to Chapter 7

According to the U.S. Bankruptcy Code (11 U.S.C. § 1307), a Chapter 13 bankruptcy can be converted into a Chapter 7 bankruptcy at any time. A debtor may choose to request this type of conversion for a variety of reasons, including:

• The court declines to confirm a Chapter 13 repayment plan - When a debtor files for Chapter 13 bankruptcy, they will file a proposed repayment plan that will allow them to pay off some of their debts over the next three to five years. If, after reviewing the person’s income and expenses, the court determines that the proposed repayment plan would not be feasible, it may decide not to approve the plan. In these cases, the debtor may decide to request a discharge of their debts through Chapter 7, as long as they meet the eligibility requirements for doing so.

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