Many people who consider themselves alone and drowning in credit card bills and loan repayments may want to consider filing for Chapter 7 or Chapter 13 Bankruptcy in the United States Bankruptcy Court in Texas. These options are available in one of Texas’ four judicial districts (Northern, Eastern, Southern and Western) based on where the filer lives and if they meet certain other criteria, which we discuss at length in this article.
Filing for bankruptcy involves a person filing a case in federal court and working with a specially-appointed “trustee” in hopes of partially or eliminating otherwise unpayable debt. A third type of bankruptcy, called Chapter 11 Bankruptcy, is available to businesses.
Although there are some stigmas and a host of misconceptions traditionally associated with bankruptcy, it can, in fact, be a fresh start for many people suffering from financial distress. The Law Offices of Seth Kretzer can help clients seeking a debt-free future in the wake of bankruptcy concerns related to the COVID-19 pandemic.
Diving in a little deeper into the two types of personal bankruptcy, Chapter 7 and Chapter 13 Bankruptcy are distinct from one another, and each is available to an individual depending upon the severity of his or her personal debt. Chapter 7 Bankruptcy is known as “liquidation bankruptcy,” and involves most of the filer’s property being sold to pay off debts. It is generally used by people who have limited income or no income and lack the ability to pay back anything on their debts for the foreseeable future.
Chapter 13 Bankruptcy, on the other hand, is known as “reorganization bankruptcy.” Filers of Chapter 13 Bankruptcy work with the Court to develop and follow court-ordered repayment plans which last typically for three to five years. Chapter 13 filers usually keep their personal and real property while paying back a portion of their debts.
Following the proceedings of Chapter 7 or Chapter 13 Bankruptcy, which largely involves financial disclosures on “schedule” forms and one or several court appearances, the Bankruptcy Court will “discharge” those debts it determines the filer cannot pay. Discharged debts are debts that no longer must be paid.
You may be wondering, “Can a judgment be discharged in bankruptcy?” The person or business who issued credit to or who won a judgment against a debtor can no longer pursue collection actions, including lawsuits, connected with discharged debts.
When Is Filing for Bankruptcy a Good Idea?
You may be asking yourself, considering recent financial struggles:
- Is bankruptcy right for me?
- Is filing for bankruptcy worth it?
- How bad is filing bankruptcy?
The answer to all these questions is the same – “it depends.” There are certain situations when bankruptcy is the right choice.
When You Are Eligible to File
Here is the first and most basic technique for how to determine if bankruptcy is right for you. If you have enough money to pay your creditors, you may be ineligible for bankruptcy. The Court will make this determination after you and your attorney complete paperwork including calculation of something called a “means test.”
After May 1, 2020, if your household income in the State of Texas is more than $49,996.00 per year for a one-person family, more than $65,708.00 per year for a two-person family, more than $72,632.00 per year for a three-person family, more than $84,724.00 per year for a four-person family, and more than $93,724 per year for a five-person family, and you have enough left over after paying your necessary monthly expenses to cover some of your debts (in other words, if you have the “means”), you will most likely not be able to receive a bankruptcy.
Calculations of means test numbers for families larger than five can be found at https://upsolve.org/tx/means-test/.
Where Your Debts Are Largely “Unsecured Debts”
Another technique for answering the question, “Is bankruptcy a good option for me?” is to sort your secured debts from your unsecured debts. Unsecured debts are debts such as credit card debts, unpaid medical bills, personal loans, and business debts. They differ from secured debts, such as car loans or mortgages, in that they are not backed by collateral or tangible property.
Unsecured debts are better candidates for bankruptcy because if you cannot pay a secured debt, the creditor has the security to take back – through foreclosing on real property or repossession of personal property. But if you cannot pay an unsecured debt, the creditor has nothing to take back.
Therefore, filing for bankruptcy on your unsecured debts (most people have a mix of both) can free up financial resources to pay for your secured debts and keep you holding on to important things like your car or home. This will put you in a better financial position overall.
When You Qualify for Exemptions
There are property exemptions that cannot be put into the pot, so to speak, by the bankruptcy trustee. These vary from state to state, with Texas exempt property comprising one of the longest lists of exemptions in the U.S.
This includes the Texas Homestead Exemption, which exempts a residence of up to 10 acres or less in a city, town or village, and up to 100 acres or less in the country (See Tex. Prop. Code Ann. §§41.001; 41.002; 41.003; and the Texas Constitution, Article 16, §§50, 510); the Texas Motor Vehicle Exemption, which allows for keeping the entire value of one motor vehicle per licensed household member [See Tex. Prop. Code Ann. §41.002(a)(9)]; Texas Personal Property Exemptions of $50,000 per single adult and $100,000 per couple for home furnishings, jewelry, clothing, food, firearms, athletic and sports equipment, burial plots and more (See Tex. Prop. Code Ann. §§41.001; 41.002); and other applicable exemptions for pension, retirement, and insurance accounts. If most of your property qualifies for these exemptions, the answer to the question, “Is bankruptcy the best option for me?” is a wholehearted yes.
When You Want an End to Collection Calls and Lawsuits
People who file for bankruptcy benefit from an “automatic stay,” meaning that numerous Texas state court actions for breach of contract, collections on book accounts, and various actions to enforce judgments all come to a screeching halt under the federal court’s preemptive power.
If the underlying debts are erased in bankruptcy, these lawsuits – along with post-judgment collection measures such as liens, wage garnishments, and levies on property – also come to an end. Knowing that all debts are being handled in one action, the bankruptcy proceeding brings peace of mind to many people.
When You’re Emotionally Comfortable with the Downsides of Bankruptcy
Experts agree that no one should discount the emotional toll bankruptcy can have. Though many feel relieved afterward, others feel anxious, depressed, and ashamed. Therefore, it is important to take time to look inward and think about how “being bankrupt” will make you feel.
If you can see the light at the end of the tunnel, you can make the judgment call to begin the process of bankruptcy with confidence, knowing it is merely one stepstone along a pathway to a better financial future.
When Is Filing for Bankruptcy a Bad Idea?
Is filing for bankruptcy a bad idea? As we said above, it depends on several factors. Just as there are times when bankruptcy is unequivocally the best way to go, there are also times when the cons outweigh the pros.
You See Your Financial Situation Improving Soon
Though you’re stretched thin and living on a shoestring budget today, perhaps you have a better paying job up ahead, an inheritance pending, or a settlement in a lawsuit on the horizon. Maybe you are about to have a life event which includes gifts, such as a wedding or graduation from school. Maybe you’re selling a large asset, such as a home.
In any of these events, if you foresee your cash flow increasing within the next year, you may want to wait out filing for bankruptcy. When your circumstances improve, you can apply more to your debts and pay them down much faster, without the consequences of a bankruptcy tarnishing your credit.
You Have Debts That Aren’t Eligible for Dismissal
Above, we discussed how unsecured debts – like credit cards and personal loans – are prime candidates for bankruptcy discharge. However, if most of your debts are a horse of a different color, such as student loans, back taxes owed to the IRS, or alimony or child support costs resulting from a divorce, you will not be able to have these discharged through a bankruptcy. Discuss with skilled bankruptcy attorneys in Houston the types of debts you have to determine if bankruptcy is right for you.
You Can’t Handle the Potential Consequences
Bankruptcies are public record. A bankruptcy can remain on your credit report for 10 years, and following a bankruptcy proceeding, your credit score could plummet, at least in the short term. This will very likely affect your chances of doing continued business the way you were used to before filing for bankruptcy – such as being approved for a mortgage, new credit card, loan, rental housing, or even affordable insurance policy.
Additionally, if you have co-signors on loans, filing for bankruptcy could leave that person who showed up for you when you needed them stranded with the full balance of the loan. These are the soft consequences of a bankruptcy, but they are still important ones to many people and should be taken into consideration.
The Law Offices of Seth Kretzer Can Help with Your Bankruptcy Case
Whether you are considering filing for Chapter 7, Chapter 11, or Chapter 13 Bankruptcy, you will need a lawyer that has experience with bankruptcy in Texas. Contact the Law Offices of Seth Kretzer today to discuss your options!