It is all too easy for debts to become unmanageable. While large debts are often seen as a failure or a sign of irresponsibility, the truth is that this issue most commonly affects people due to no fault of their own. An unexpected illness or a serious injury can result in massive medical expenses, and it can also affect a person's ability to work, leading to increasing bills and difficulty covering basic living expenses. Issues such as the loss of a job or a divorce can also lead to unexpected expenses and problems covering the costs of living. 

In these situations, bankruptcy may be the best option for getting rid of debts and returning to a position of financial stability. However, many people who are considering bankruptcy are unsure about whether they should file under Chapter 7 or Chapter 13. By answering the following questions, you can determine which option would be best for you.

Does Your Family Make More Than the Average Income?

Chapter 7 bankruptcy, which is sometimes referred to as “straight” bankruptcy, may be the best option. It can usually be completed within a few months, and it will allow for the discharge of most or all of your debts, meaning that they will be completely eliminated. However, to qualify for Chapter 7, you will need to pass a “means test.” The first part of this test examines your income. If you make less than the median income in your state for your family size, you will qualify. For example, if you live in Texas, are married, and have two children, you will need to make less than $93,386, which is the median income for a family of four in 2022.

A homeowner who has encountered financial difficulties may have a number of options that will allow them to avoid losing their home. While different forms of bankruptcy may be an option that will allow a person to prevent foreclosure, there are some situations where maintaining ownership of a home will not be possible. In some cases, a person may consider a short sale of their home, which will allow them to sell the property for less than the amount owed on the mortgage without the requirement to pay a deficiency to their lender. However, a homeowner will need to understand whether it is a good idea to do so while also pursuing debt relief through bankruptcy.

Short Sales and Chapter 7 Bankruptcy

Chapter 7 bankruptcy will allow a person to discharge most of their debts, providing them with financial relief and ensuring that they can avoid difficulties in the future. In most cases, it will not be a good idea to pursue a short sale before, during, or after filing for Chapter 7. One of the primary benefits of a short sale is to avoid a deficiency judgment that may be owed to a mortgage lender if a home is sold for less than the amount owed on the loan. However, Chapter 7 will discharge the debts a person owes, including deficiency judgments, so pursuing a short sale will not provide a homeowner with any advantages. 

In general, allowing a home to be foreclosed upon is a better option than pursuing a short sale after bankruptcy. Going through the process of selling the home may involve expenses without providing a person with any financial benefits. However, foreclosure may allow a person to stay in the home for a certain period of time until they are required to vacate the property. While they will not be required to make mortgage payments during this time, they may need to pay taxes, insurance, and homeowner’s association fees. Before they leave the home, they may be able to save money as they find new living arrangements.

People who are considering bankruptcy are often in dire financial straits. The accumulation of multiple forms of debt may have caused a person to get behind on some or all of their payments, especially if they have also experienced a loss of income. As creditors and collection agencies begin calling and seeking repayment, a person may be worried about how to address these issues, but in many cases, they may be focused on more immediate concerns, including the possibility of eviction from their apartment or house due to the nonpayment of rent. In these situations, a person will want to understand how bankruptcy may help them avoid being put on the street.

Preventing an Eviction by Filing for Bankruptcy

Filing for bankruptcy is one of the most effective ways to deal with outstanding debts and actions taken by creditors or landlords. As soon as a bankruptcy petition is filed, a form of protection known as the automatic stay will take effect. This will prevent creditors from doing anything to collect what is owed, including contacting the person to ask for payment. The automatic stay will generally apply to evictions, so if a landlord has notified a tenant that they are pursuing an eviction, or if the landlord has begun the eviction process, they will be required to stop these actions during the bankruptcy case. However, if a landlord has already gone to eviction court and obtained a judgment of possession, the automatic stay will not stop them from carrying out this judgment. This shows that the timing of a bankruptcy filing is important, and to stop an eviction, a person will need to file their bankruptcy petition as soon as possible after learning that their landlord is planning to take legal action against them.

Addressing Evictions Through Chapter 7 or Chapter 13 Bankruptcy

During the bankruptcy process, a person will want to determine how to address their debts and avoid consequences for failing to pay what they owe. In cases involving evictions, a landlord will usually be able to proceed with an eviction unless all rent that is owed is paid in full. Because of this, Chapter 7 bankruptcy may not be the best solution for avoiding an eviction. While Chapter 7 may wipe out a person’s debts, their bankruptcy case may be completed within a few months, after which their landlord will be able to resume eviction proceedings. Unless the elimination of other debts frees up funds that may be used to pay past-due rent, a person may be unable to avoid being evicted.

When a person or family is struggling with debts and related financial issues, it can sometimes seem like there is no way out of this situation. While bankruptcy may be an option, many people are hesitant to pursue this form of debt relief because they worry that they will lose some or all of the property they own. Fortunately, there are a number of exemptions that can be used to protect property and ensure that a family will not have to completely start over. 

When filing for Chapter 7 bankruptcy, these exemptions may prevent certain assets from being seized and liquidated. In fact, many debtors will qualify for a no-asset bankruptcy in which all of their assets will be exempt. However, debtors will need to make sure they claim exemptions correctly. Claiming invalid exemptions may delay a debtor’s ability to complete their bankruptcy, or certain assets may be determined to be non-exempt, resulting in the liquidation of these items.

Reasons Creditors or Trustees May Object to Exemptions

During the bankruptcy process, a debtor will be required to attend a meeting of creditors, which is often referred to as the “341 meeting,” because the procedures for this meeting are described in Section 341 of the U.S. Bankruptcy Code. Creditors may or may not actually attend this meeting, and the proceedings will generally focus on reviewing the documentation provided by the debtor about their income and assets and making sure all the information provided is correct. 

Originally published: February 12, 2021 -- Updated: May 16, 2022

UPDATE: As discussed below, wage garnishment is generally not allowed in Texas except for a few types of debts. However, this does not mean that creditors cannot take action to collect debts from a person. In fact, the garnishment of a person’s bank account may be effectively the same as garnishing their wages. By understanding the types of actions a creditor can take, a debtor who is facing this type of situation can determine their best options for receiving relief from their debts. 

If a creditor obtains a judgment against a debtor requiring the debtor to pay the debts that are owed, the creditor may then ask for a turnover receiver. This type of court order will be sent to a person’s bank, and the bank will freeze the debtor’s bank account. This will prevent them from withdrawing any money from the account. Some or all of the funds in the account may then be seized by the creditor.