Chapter 7 (Liquidation)
Bankruptcy proceeding under 11 U.S.C. §§ 701-784 in which a court-appointed trustee liquidates the debtor's non-exempt assets and distributes proceeds to creditors. Available to individuals (subject to means test) and business entities. For individuals, typically results in discharge of qualifying debts. For business entities, typically results in dissolution. The most common form of business bankruptcy for entities without viable reorganization path. Means test under § 707(b) limits individual eligibility.
Chapter 7 is the bankruptcy proceeding in which a court-appointed trustee liquidates the debtor's non-exempt assets and distributes proceeds to creditors. Chapter 7 is available to individuals (subject to means test) and business entities. For individuals, Chapter 7 typically results in discharge of qualifying pre-petition debts after liquidation. For business entities, Chapter 7 typically results in dissolution, the entity ceases to exist after asset distribution. Chapter 7 is the most common bankruptcy form: faster and less complex than Chapter 11, but providing no reorganization opportunity.
The means test
The means test (§ 707(b)) limits individual Chapter 7 eligibility based on income: (1) median income comparison, debtor's current monthly income compared to state median; below median typically qualifies; (2) disposable income calculation, for above-median debtors, calculation determines available income for Chapter 13 plan; if above thresholds, Chapter 7 may be presumed abusive; (3) presumption rebuttal, debtor can rebut presumption with special circumstances. Above-median debtors often required to use Chapter 13 instead. Business entities (corporations, LLCs) face no means test.
The trustee role
Court-appointed Chapter 7 trustee: (1) takes possession of non-exempt assets; (2) liquidates assets, sales, auctions, recovery of preferences and fraudulent transfers; (3) reviews and objects to claims; (4) distributes proceeds per priority scheme. The trustee receives compensation as percentage of distributed assets. Trustees aggressively pursue avoidable transfers, undisclosed assets, and recovery actions to maximize estate value.
Texas exemptions
Individual debtors can elect federal or state exemptions; Texas exemptions are typically more favorable: (1) homestead, potentially unlimited value (subject to acreage limits: 10 acres urban, 100/200 rural); (2) personal property, up to $100K/$50K (family/individual) for specified categories; (3) retirement accounts, fully exempt; (4) life insurance and annuities, generally exempt; (5) tools of trade; (6) specified personal items. Texas's homestead exemption is among the most generous in the nation, making Texas a debtor-favorable jurisdiction.
Discharge, § 727 and § 523
For individuals, Chapter 7 discharge releases dischargeable pre-petition debts: (1) § 727 denials, fraud, concealment, false oath, failure to keep records; (2) § 523 non-dischargeable categories, taxes within specified periods, fraud-induced debts, domestic support, willful and malicious injury, certain student loans, drunk-driving liability, criminal restitution. Most consumer debt (credit cards, medical, unsecured) is discharged. Secured debts continue against collateral. Business entities do not receive discharge, they cease to exist.
Priority distribution
Chapter 7 proceeds distributed per § 507 priorities: (1) secured creditors, to extent of collateral value; (2) administrative expenses, trustee fees, professional fees; (3) priority unsecured, domestic support, certain employee wages, certain taxes; (4) general unsecured, pro rata distribution; (5) subordinated claims; (6) equity, only after all creditors paid in full (rare). Most general unsecured creditors receive small recovery (cents on the dollar); equity receives nothing in most cases.
For Texas debtors, Chapter 7 vs. Chapter 13 election depends on income, assets, and goals. Best practice: (1) consult experienced bankruptcy counsel before filing, strategy matters substantially; (2) for individuals, evaluate means test eligibility; (3) elect Texas vs. federal exemptions based on asset profile (Texas homestead favors home owners; federal exemptions more generous for some personal property); (4) avoid pre-bankruptcy planning that constitutes fraud or preference; (5) file all required schedules and statements completely. For creditors: (1) file proof of claim timely; (2) attend § 341 meeting of creditors; (3) consider non-dischargeability claims under § 523 where applicable; (4) monitor trustee actions and case progress.