In my 28 years as an attorney, these questions seem to pop up again and again regarding Texas Bankruptcy:
1. I have heard I want to file Chapter 7. Why?
Chapter 7 bankruptcy is often the quickest way to get a fresh start from credit card debt or medical bills while keeping your home, vehicles, personal property, and retirement. Chapter 7 is often called liquidating bankruptcy. The liquidating label comes from the fact that in theory, you sell some of your assets and give that money to a Trustee to divide it up amongst your creditors. I say in theory this liquidation occurs because in reality most if not all of your assets are protected by law. The entire process from the time you file until your debts are discharged is 60 to 90 days.
2. What assets will I get to keep?
Assets in Texas that you will not be forced to sell include your home, personal assets including a vehicle for each driver in the family, tools of the trade – e.g. a truck used in your plumbing business, and pretty much anything around the house you feel you need. Now to keep your home you do have to keep making the mortgage payments, keep insurance current and the taxes paid. Same with your cars. There are some other limitations such as you only get to have $60,000 worth of personal property assuming we are talking about a family but since the values are based on what you could sell the property for, few people have this much stuff. If you have ever had a garage sale you know that everything in your living room is worth less than $1,000 total and your clothes are not worth much at all. That big screen TV you bought two years ago for $1,500 is being sold brand new at Walmart today for $175, which makes yours worth $50 maybe. So since we live in a throw away world, $60,000 goes a long way. I’ve seen very few folks over the last 28 years that have enough stuff to go over that mark.
3. Will I lose my retirement?
Most common retirement assets are exempt. IRA’s, 401(k)’s, Teacher Retirement and most qualified pension plans are exempt as are life insurance and annuities. The lesson here is don’t borrow against a 401(k) unless you have consulted with an attorney. I’ve had many clients break down in tears when they find out they could have saved their retirement instead of giving it to the credit card companies.
4. Can I file bankruptcy on some debts but not other debts?
Yes and no. You must list all of your debt and name the person or company you owe. Having said that you can agree to keep making your house payment, car payment and pretty much any other secured debt through a process called reaffirmation. You can pay back any other debt but you will not be legally required to do so.
For example, let’s say you borrowed $5,000 from Uncle Billy a few years ago and still haven’t paid him back. You must list Billy on you bankruptcy but that doesn’t mean you can’t pay him back after the bankruptcy. It does mean that Uncle Billy can’t sue you for it nor can his estate if he kicks the bucket.
5. So what is a Chapter 13 and why would I ever want to try that route?
Chapter 13 is a lot like debt consolidation. You prepare a budget and figure out how much the difference is between your monthly income and expenses. This is disposable income. In a Chapter 13 you continue making your normal monthly expenses and give the disposable income to the Trustee who then pays your unsecured debt. You do that for up to 5 years and then you are done. Unsecured debt that doesn’t get paid goes away.
The two most common instances a Chapter 13 is beneficial are when the client is behind on house or car payments, or has problems with IRS debt. A Chapter 13 allows the client to catch up on house payments over the course of the “plan” and can force the IRS into a structure payout so that you can see the light at the end of the tunnel.
6. Can I be discriminated against for filing bankruptcy?
Federal law prohibits governmental units or private employers from discriminating against you for filing bankruptcy. In fact I have had many clients over the years come to me because their employer wanted them to clean up their financial situation to avoid future lawsuits.
7. Will filing bankruptcy effect my credit rating?
Probably not much. If you have come to see me you probably already have a bad credit score or it is about to go south even if you don’t file. The good news is that the bankruptcy will give you a fresh start without the worry that someone might take a judgment against you. Even though the bankruptcy will show on your report for a number of years, your credit rating will climb upward during that time assuming you pay your other bills and debts such as car payments on time.
8. Will filing for bankruptcy stop the creditors from calling?
Yes. Once they have been given notice that you filed, they are under court order not to attempt to collect. Any claims they have must go through the bankruptcy court system. If they persist, they are in contempt of court and the bankruptcy judge can fine them. Even lawsuits against you will be stopped upon giving the court notice.
9. What about credit cards? Will I lose them and if I do will I be able to get
You must list all of your debt so the cards you list will probably be canceled. If you own a card that has a zero balance you probably won’t list it and the card won’t be canceled. After you file you will probably be offered new “pre-approved” cards. Why? Because they know you have just cleaned up your old debt. I urge my clients to be very wary as in many cases, credit cards are what got them to my office in the first place.
10. Are there other options?
Credit counseling works in some cases but be very cautious. This is a long term cure and at the end you may be in a worse state than you were when you started. Also be sure to get a referral as there are many groups that are out to get a fast and in some cases illegal buck and run.