A Guide to Bankruptcy in Texas
Filing for bankruptcy in Texas can be confusing and unnerving. Even with legal counsel, it can be comforting to know the steps needed to complete the bankruptcy process. Below is a simple run through what to expect when you file for bankruptcy.
When you file for bankruptcy you need to collect pertinent documents such as:
- List of current income sources
- Major recent financial transactions
- Monthly budget
- Secured debts
- Unsecured debts
- Asset List
- Tax returns for last 2 years
- Title documents
When you go to file, you will need to write a bankruptcy petition and fill out several court forms. It is best to get the help of an experienced bankruptcy attorney, as these can be complicated. Fill the forms out truthfully and to the best of your ability.
Automatic Stay Goes In Effect
After filing, an automatic stay goes into effect immediately. The stay prevents creditors from contacting you and trying to collect. This will stop any foreclosure proceedings and any asset division from a divorce.
Bankruptcy Trustee is Assigned
When you file, a bankruptcy trustee will be appointed to your case. They will then take legal possession of your property that is non-exempt. Their job is to look at all your assets, and figure out how your creditors can get paid.
341 Meeting of Creditors
After about a month, the court will call a § 341 meeting. This is a 5-10 minute proceeding where the debtor will meet with creditors to determine a plan. In many consumer bankruptcy cases creditors do not often attend. If a plan cannot be established, a judge will intervene and a plan will be created.
That is the very basic run down of the bankruptcy process. Now, we’ll get into specifics about Texas.
Texas Goes Against the Grain with Chapter 7 and Chapter 13 Filings
In the U.S. overall, generally more than twice as many Chapter 7 “straight bankruptcy” cases are filed than Chapter 13 “adjustment of debts” ones. In 2012, for example, 69 percent of the 1.2 million bankruptcies, about 816,000 of them, were Chapter 7 cases.
That is not the case in Texas where fewer Chapter 7 cases are filed than Chapter 13 cases. In 2012, only about 43 percent of bankruptcies registered within Texas were Chapter 7 cases, about 21,000 out of about 48,400 total bankruptcies.
With that in mind, we’ll outline specifics on the simplest case scenario for both Chapter 7 and Chapter 13.
What does the Simplest Chapter 7 Case Look Like?
A very straightforward Chapter 7 case:
- Protects you and your possessions and property right away from all of your creditors;
- Enables you to hold onto everything you own;
- Lets you keep or surrender any collateral based on your choice; and
- Discharges (legally writes off) all your unsecured debts.
It’s worth noting that if your income is below the state of Texas’ median income for households of a similar size, you are eligible to file for Chapter 7 bankruptcy. If your income exceeds the median income level, you must pass a means test to file under the terms of Chapter 7 which takes into account your income and expenses.
Now, let’s take a closer look at the process.
1) You Are Protected Right Away
The moment your Chapter 7 case is filed, virtually all collection efforts by creditors against you are legally stopped. This includes virtually any and all ways to collect a debt—garnishments, lawsuits, judgments, phone calls, mailed or emailed bills and collection letters, home and other real estate foreclosures, repossessions of vehicles and furniture, income tax liens. In addition, if a creditor does continue trying to collect illegally, the bankruptcy court can punish them. As a result, almost all creditors do immediately stop once they become aware of a Chapter 7 filing.
There are some exceptions so this protection, but they are quite narrow. There are some very specific kinds of obligations and legal proceedings not affected by a Chapter 7 filing, like criminal fines and criminal proceedings, as well as child support arrearage and many domestic relations matters. In addition, very rarely, if you filed and had dismissed one or more bankruptcy cases in the prior year, the protection against creditors either does not come into effect at all or potentially expires after 30 days.
In the simplest Chapter 7 case, the protection kicks in when your case is filed, it applies to all your creditors, and they all immediately honor it by stopping all their actions against you.
2) Keep Everything You Own
In most Chapter 7 cases, everything you own is “exempt”—protected from your creditors, and thus also protected from the Chapter 7 trustee who acts on their behalf.
Both federal bankruptcy law and each state’s laws provide lists of types of properties and dollar amounts that are exempt. Texas lets you choose between using either its exemptions or the federal exemptions. In general the Texas exemptions are much more generous than the federal ones, but there may be certain circumstances when the federal ones are better.
So, in the simplest Chapter 7 case, everything you own outright is exempt, and you keep it all.
3) Follow Your Choice about Any Collateral
Under Chapter 7 you generally have the choice to either surrender collateral—your home, car, truck, or whatever you purchased—or to keep that collateral by catching up and keeping up on your payments on the debt.
The immediate advantage of surrendering collateral under Chapter 7 is that of course you can stop making payments on that debt, and also stop paying related expenses, like insurance on a vehicle loan (once you’ve surrendered it). But you also almost never have to pay any of the remaining “deficiency balance,” the amount you would often still owe after your creditor sells the surrendered collateral and credits the proceeds to your account.
Under Chapter 7 you can usually keep the collateral, especially if you are current, or can get current within a few weeks. In some situations, you might want to enter into a “reaffirmation agreement” whereby you “reaffirm” your debt, excluding it from the discharge of your other debts.
In the simplest Chapter 7 case, you can surrender the collateral and usually owe nothing, or you can keep it if you are current (or close to current) on your secured debt and are willing to reaffirm (keep paying) that debt.
4) Discharge All Debts that You Want To
In most Chapter 7 cases, all debts are discharged— legally written off—with certain exceptions.
There are two kinds of exceptions, one that involves your right to a discharge of ANY of your debts, and another that involves your ability to discharge certain specific debts.
In the unusual event that a debtor hides assets or lies to the bankruptcy court or trustee in some other significant way, that debtor could potentially lose the ability to get a discharge altogether. Also, filing a new bankruptcy case too soon after an earlier one could result in no discharge of debts in the new case.
Certain specific kinds of debts are never discharged—child and spousal support, for example. Some kinds of debts which are only discharged under very specific or limited circumstances—income taxes and student loans, for example. Finally, there are debts which are discharged unless a creditor raises and proves the existence of specific conditions—for example, a loan that was procured through the debtor’s misrepresentations.
In the simplest Chapter 7 case, you qualify for a discharge, and all your debts are in fact discharged.
What does the Simplest Chapter 13 Case Look Like?
Under Chapter 13, you and your attorney propose a payment plan based on your ability to pay. Through this plan you usually pay back only part (if any) of your debts, and sometimes only a little to some of your creditors.
Your plan states how much you pay each month — almost always much less than you were paying before. You pay that amount for a period usually covering three to five years, and at the end of that time you no longer owe any debts, except long-term ones like your home mortgage, if you so choose, and student loans. The rest of the unpaid debts are discharged, or legally written off, and you are debt-free.
Your proposed plan is built around a detailed set of laws about how you must treat each kind of debt. If you have certain kinds of special debts called “priority” debts — such as newer income taxes or any child support arrearage — those would have to be paid in full over the life of your plan. Secured debts, like your mortgage(s), vehicle and furniture loans, are treated in a special way, whether these are paid in full or in part depending on many factors. Debts that are neither priority nor secured are called “general unsecured” debts, and are generally paid only to the extent that there is money left over to pay them – most people do not have to pay any of these amounts back. Especially with priority and secured debts, Chapter 13 usually gives you significant advantages over how these creditors are handled compared to Chapter 7.
Even a Simple Chapter 13 Is Very Powerful
Here are some potential benefits of even a straightforward Chapter 13 case, none of which are available under Chapter 7:
- You will have up to five years to cure your mortgage arrears (the amount you are behind in payments) while your home is protected from foreclosure.
- If your home is worth less than your first mortgage balance, you might be able to “strip off” a second mortgage from your home’s title and avoid making those second-mortgage monthly payments.
- If your vehicle loan is over than two and a half years aged & the vehicle value is less than the debt you owe, a “cram-down” on that loan reduces both your monthly payment and the complete amount you pay before you personal the vehicle free and clear.
- You will be able to pay any portion of back income taxes that can’t be discharged while being protected from tax collection (including wage garnishment) by the IRS.
- You will be able to catch up on your child and/or spousal support arrears while being protected from the extreme collection powers of support enforcement agencies.
Unique to Texas
Under Texas law, the following are eligible as exemptions other when filing for Chapter 7 or Chapter 13 bankruptcy:
Furniture, food, pets, Bible or other book containing sacred writings, firearms, certain kinds of clothing, jewelry, sports equipment, motor vehicles, life insurance, tools of the trade, farm animals, unpaid commissions for personal services, current wages, health aids prescribed by a doctor, insurance benefits, IRAs, 401(k)s, and other retirement benefits, Social Security benefits, and veteran’s benefits.
The Texas Personal Property Exemptions
Texas is also very flexible in how its personal property exemptions work. Most states give a list of categories of property—vehicles, furniture, tools of trade, and such—and then specify a maximum dollar amount in value allowed as exempt in each category. Instead Texas groups together most (but not all) personal property and then gives a relatively generous exemption amount for assets within this broad group, $30,000 for single person, $60,000 for a family with two spouses. This group includes furniture, clothing, jewelry, tools of trade, one vehicle per person, two firearms per person, and farm animals and household pets. Note that in the case of vehicles and other collateral with debt against them, these amounts protect your equity, AFTER subtracting off the amounts that you owe. Not being stuck with one maximum exemption amount for each little category of assets makes it easier to exempt all of what you own.
Beyond this $30,000/$60,000 group exemption, Texas also provides specific additional exemptions for all wages (except in the case of child support), prescribed health aids, received alimony and spousal or child support, health savings accounts, many kinds of insurance benefits, and most retirement accounts.
Texas is one of a small handful of states which provide an unlimited homestead exemption for your home, meaning that it does not matter how much it is worth or how much equity you have in it. Most states have a maximum amount you can protect, and after that it could be sold to pay your creditors. Not in Texas. There’s no limit.
There are some acreage maximums—10 acres in a city, town or village, 100 acres in the country (200 acres for a family). And federal bankruptcy law applies a maximum (currently $146,450) to amount of equity you can protect if you bought your Texas home less than 1215 days (about 3 and 1/3rd years) before filing the bankruptcy case.
Chapter 12 Bankruptcy for Texas Farmers and Ranchers
Chapter 12 of the U.S. Bankruptcy Code is a specialized type of bankruptcy designed for family farmers, ranchers, dairy owners, poultry and livestock producers, as well as family fishermen. It helps you save your farm and business by allowing you to reorganize your finances, reducing and restructuring your debt.
If you qualify, Chapter 12 provides some very important benefits, often better than those available in either Chapter 13 or Chapter 11, the other two possible options for reorganizing a business.
Qualifying for Chapter 12
You as an individual, you and your spouse, or the corporation or partnership in which you are an owner can file a Chapter 12 case only if the individual(s) or business entity filing the case meets the special definitions of a “family farmer or family fisherman with regular annual income” found in subsections 101(18) and (19) of the Bankruptcy Code. For farmers and ranchers, here are the qualifications:
- Debt limit: total debt of no more than $3,792,650.
- Farming debt ratio: at least 50% of the total debt of the individuals or business entity is from the “farming operation” (subsection 101(21)), excluding the debt on the principal residence (if that debt does not arise from the “farming operation”).
- Farming income ratio for individuals: more than 50% of the gross income must have been received from the “farming operation.”
- Separate requirements for farming corporations or partnerships:
- Ownership: more than 50% of the business ownership must be in one family, or in that family and its relatives.
- Asset ratio: more than 80% of the entity’s assets must be from its “farming operation.”
The Advantages of Chapter 12
Chapter 12 is designed for family farming, so it is less complicated and less expensive than Chapter 11 “corporate reorganizations,” while being more flexible than Chapter 13:
- Unlike Chapter 13, in which a payment plan must be either submitted at the beginning of the case or within approximately two weeks, in Chapter 12 the farm debtor has 90 days or sometimes even longer to file a proposed plan. And instead of making payments to the trustee under the plan right away as in Chapter 13, the Chapter 12 debtor does not need to make payments to the trustee until 30 days after the Chapter 12 plan is approved by the court.
- Cram down—paying secured debts based on the reduced value of the collateral—applies to all secured debt, including residential mortgages (unlike Chapter 13), nonresidential mortgages, equipment loans, and vehicle loans. This often effectively reduces the total amount of debt to be paid while also stretching out the term of payments, significantly reducing the amount of the monthly and/or annual debt payments.
- Debtors in Chapter 12 can sell a portion of the farm real estate and pay significantly fewer taxes on the profit from that sale.
Chapter 12 is arguably the most debtor-friendly option in the Bankruptcy Code.
Bankruptcy Fees in Texas
Bankruptcy Filing Fees
Bankruptcy filing fees are the same in every state of the country. If you’re filing for Chapter 7 bankruptcy, the fee is $306. If you’re filing under the terms of Chapter 13, the filing fee is $281. These fees are the same regardless of whether you’re filing alone or a joint petition. In the vast majority of cases, you’ll need to pay the fee at the time of your filing. Depending on a person’ situation, you may be able to pay the filing fee in installments or have it waived altogether – though this is usually reserved for people who are poverty-stricken.
Attorney Fees in Bankruptcy
In most Chapter 7 bankruptcy cases, attorney fees are paid up front. Alternatively, in Chapter 13 bankruptcy most attorneys ask for partial payment upfront with the remaining fees paid in monthly installments through your Chapter 13 plan.
Credit Counseling Fees in Bankruptcy
Under the US Bankruptcy Code, if you file for bankruptcy you must undergo credit counseling from a nonprofit credit counseling agency. Agencies must be approved by the United States Trustee within 180 days of your filing for bankruptcy. While rates vary, in general you can expect to pay around $15 to complete any required credit counseling. Additionally, debtors must take a course in managing their personal finances, which costs around $15 for Chapter 7 cases but is free for Chapter 13 debtors when taken through the court. Both the credit counseling and personal financial management courses can be completed in person, online, or over the phone.