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. Business entities receive no discharge and typically stop operating. Any formal dissolution happens under state law. The most common form of business bankruptcy for entities without viable reorganization path. The § 707(b) means test applies to individuals whose debts are primarily consumer debts.
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. Business entities receive no Chapter 7 discharge (§ 727(a)(1)) and typically stop operating after their assets are distributed. The bankruptcy case itself does not dissolve the entity under state law. 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)) applies to individual debtors whose debts are primarily consumer debts and screens their Chapter 7 cases for abuse 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. The means test does not apply to business entities or to individuals whose debts are not primarily consumer debts.
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, and in bankruptcy to the § 522(p) cap of $214,000 on homestead interest acquired within 1,215 days before filing, for cases filed on or after April 1, 2025); (2) personal property, up to $100K/$50K (family/individual) for specified categories; (3) retirement accounts, exempt to the extent tax-qualified; (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 a discharge (§ 727(a)(1)).
Priority distribution
Secured creditors look first to their collateral, to the extent of its value. The rest of the estate is distributed under § 726 in this order: (1) priority claims in the order set by § 507(a), which ranks domestic support obligations first, then administrative expenses such as trustee and professional fees, then claims such as certain employee wages and certain taxes; (2) general unsecured, pro rata distribution; (3) subordinated and late-filed claims; (4) the debtor, only after all creditors are paid in full (rare). Most general unsecured creditors receive small recovery (cents on the dollar); equity receives nothing in most cases.
For Texas debtors, the choice between Chapter 7 and Chapter 13 turns on income, assets, and goals. Relevant questions include whether the means test applies, whether the Texas or federal exemptions fit the debtor's assets better (the Texas homestead exemption favors homeowners, while the federal list is more generous for some personal property), and whether any pre-filing transfers could be attacked as fraudulent or preferential. Schedules and statements must be complete and accurate. Creditors typically file a proof of claim when the trustee reports assets to distribute, may attend the § 341 meeting of creditors, weigh nondischargeability complaints under § 523 where the facts support one, and monitor the trustee's work.