KATRINA EVACUEE INFORMATION: REGARDING BANKRUPTCY Significant changes to the Bankruptcy Code will become effective as of October 17, 2005. But, special bankruptcy legislation has been introduced in hopes of helping. Bankruptcy and other courts have been affected by the hurricane, and this is likely to affect the place and timing for handling bankruptcy cases. WHAT IS A CHAPTER 7 OR CHAPTER 13 BANKRUTPCY? 1. Under an ordinary (liquidation) bankruptcy Chapter 7, a debtor files papers in federal court listing everything she owns and all of her debts. If the debtor owns property that is not exempt (see paragraph G), the bankruptcy trustee will sell this property and apply the money to the debts. After this process, most debts are discharged and no longer legal owed by the debtor. 2. But, for a debtor’s secured debts (debts for which there is a collateral), the debtor must wok out a reinstatement plan with the creditor or the creditor may choose to repossess the property. For debts secured by non-purchase money collateral classified as “household goods”, the bankruptcy judge may permit the debtor to keep the property and discharge the debt as well. Under the new law, a debtor with too much income may not file under Chapter 7. 3. In a wage-earner bankruptcy Chapter 13, the debtor files papers in the federal court listing all debts. The debtor must enter into a plan to make payments on these debts three to five years. Under the plan the debtor makes one monthly payment to a court appointed trustee. The trustee keeps a percentage (10%) of the monthly payment as a fee. The balance of the payment is used to pay on your debts. To qualify for a Chapter 13 bankruptcy, a debtor must have a regular source of income. Welfare or disability benefits may be the regular source of income. 4. Under a Chapter 13 bankruptcy, the debtor does not have to pay the unsecured creditors the entire amount owed. She may propose, for example, to pay each of the unsecured creditors only $0.25 or $0.50 on the dollar. Once these payments are made, the debtor will be discharged of all further liability on the debts. 5. Under current law, if the debtor has secured debts other than a home (for example, a car or furniture), the debtor may reduce the amount owed to the current market value of the property, extend the payment period, and reduce monthly payments. Under the new law, certain secured debts (such as vehicles purchased within 90 days if filing or other items of personal property purchased within one year of filing) may not be reduced to the value of the property. “Market value” will also be higher in general under the new law. 6. If the debtor’s home is secured by a mortgage, the debtor may keep his home by resuming monthly payments the month following the filing of bankruptcy coupled with a plan to pay the delinquent balance, with interest, over a period of up to five years in a Chapter 13 bankruptcy plan. WHAT PROPERTY IS EXEMPT? In Texas, exempt property usually includes a homestead, retirement plans, personal property and personal property includes household furnishings, clothing, some jewelry, 2 guns and other items up to $60,000.00 in value. IN WHICH STATE SHOULD I FILE?
If you moved to Texas recently because you evacuated from the hurricane, if you file after the move you will need to file in Louisiana. WHAT CAN HAPPEN IF I DO NOT PAY A DEBT? The creditor may demand payment, turn the account over to a collection agency for collection or file suit but- you cannot be put in jail for not paying the debt. However, you may be jailed for contempt of court for failure to pay child support, charged with a crime for theft of services or writing “hot checks”. CAN MY WAGES BE GARNISHED OR WITHHELD? No, but for limited exceptions. Your wages may be garnished by the Internal Revenue Service for delinquent income taxes and for delinquent court ordered child support and/or alimony payments. A limited administrative garnishment of wages is permitted if you are delinquent in the payments required on your state or federally guaranteed student loans; a maximum of 10% of your wages (after taxes and withholding) may be garnished. A notice must be mailed to you 30 days before a garnishment is started. Wages may not be garnished by any other creditor. A court may not order a turnover of current wages to pay a debt or judgment. CAN A CREDITOR REPOSSESS ANY OF MY PROPERTY? Yes, in some cases. People sometimes put up something that they own or are buying as “collateral” or “security” for a loan. Also when you buy a car or other property on an installment basis, the car or other property is usually collateral and the creditor can repossess it if you do not make your payments. People often put up their household goods as collateral for loans from finance companies, and their household goods can then be repossessed if they do not pay back the loan. Generally there is no collateral for credit card debts. Creditors must act peacefully if they repossess anything. They cannot break into your garage or your house. You do not have to let creditors trying to repossess property into your house or on your property, except for an official with a court order. If there is no court order, tell the collector to leave you or will call the police or sheriff. If they refuse, call the police or sheriff. WHAT CAN HAPPEN TO ME IF I AM SUED ON A DEBT? If you are sued, a judgment will be obtained against you for the amount you owed plus court costs and attorney’s fees. A judgment is simply a court order finding that you either received services or borrowed money and have not paid for those services or repaid the money. A court judgment will be filed of record in the judgment records of the county in which you live. A judgment is valid for only ten years, unless the creditor renews it. WHAT ARE THE EFFECTS OF A JUDGMENT? First, if you try to buy or sell real estate, you will have to make arrangements to pay the judgment in order to obtain clear title to the real estate bought or to give good title to the real estate sold. In the case of a
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sale, the judgment debt, including interest, will be paid from the sale money before you receive any money yourself. Second, it will be more difficult to obtain credit since the various credit reporting agencies periodically check the judgment records. They will note on your credit report for seven years that you have outstanding judgment against you. This will result in a lower credit rating. The judgment should not however affect our existing credit but will if you seek new credit or an increase in an existing line of credit. Third, the creditor does have the right to find out if you have any property which it can take to pay the amount you owe. In other words, it has the right to determine whether you own any nonexempt property. To determine this, the creditor may send you a list of questions inquiring about the property you own or schedule you for a deposition. The only purpose is to determine whether you have property which is not exempt under Texas law. If you do not answer the questions or appear for the deposition, you may be held in contempt of court and a bench warrant issued for your arrest. But, you cannot be compelled to pay any amount if all your property is exempt under Texas law, once you answer questions. DO I HAVE A RIGHT TO STOP CREDIT COLLECTION CONTACTS? Yes if a creditor turns an account over to a third party to collect, such as collection agency, you have the right to request in writing that the credit collection agency stop all contacts. Under the Federal Fair Debt Collection Practices Act, a collection agency must cease contacts if it receives a request in writing that it stops all communications. Keep a dated copy of any written request you make. A sample letter is available on request. A creditor collecting its own debt is not required to stop contacts by the Federal Fair Debt Collection Practices Act but it is prohibited from harassment by the Texas Debt Collection Practices Act. Keep a log of the date, time, business and person, and substance of calls. Debt collection harassment may violate either the state or federal collection laws. If you believe the creditor is harassing you, you should consult a lawyer. MAY I GET RID OF ALL MY DEBTS IN BANKRUPTCY? Not always. A bankruptcy will generally not eliminate debts for child support or alimony (domestic support?), federally insured student loan debts, criminal fines or restitution (or prevent criminal “hot check” charges), income taxes in many cases (see below), property taxes, or many other government taxes, debts incurred by employing false financial statements, or other fraudulent means, or debts for willful and malicious torts such as assault or drunk driving damages. Student loans may very rarely be discharged in Chapter 7 or Chapter 13 bankruptcy only if “extreme hardship circumstances” prevent even small installment payments both now and for the foreseeable future. You may also have to show good faith past efforts to pay within your financial ability. WHEN MAY I GET RID OF INCOME TAXES? The question of when income taxes are discharged can be very complicated. You should not make a decision on bankruptcy to discharge income taxes without first consulting a lawyer.
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Taxes are the debts which normally may not be discharged in bankruptcy cases. Income taxes can be discharged if more than three years have passed between the date the return was due and the filling of the bankruptcy, unless a tax return was not filed or the debtor attempted to evade the tax. Income taxes with respect to which a return was filed late and within two years before filing bankruptcy cannot be discharged. Income taxes assessed within 240 days before filing bankruptcy or, not yet assessed but assessable after filing of bankruptcy, cannot be discharged. DOES BANKRUPTCY HURT MY CREDIT RATING? Bankruptcy does not always make it impossible to get credit, but it may make it difficult to obtain new credit after the bankruptcy. In some cases the benefit a bankruptcy discharge of substantial debt will be a long positive in evaluating future requests for credit. The fact that you have filed bankruptcy will stay on your credit record for ten years. The credit record can also show the prior debt history for other debts for seven years. But it would also show if the debts were discharged in bankruptcy and no longer owed. If you expect to need credit in the next few years, for a car, business, house, furniture, or appliances, you have to rebuild your credit record from scratch, often with merchants who charge higher interest rates and strict enforcement of default remedies when payments are late. However, the credit rating of a debtor who owes substantial amounts, especially if he is in default, is already poor. For that reason, a bankruptcy may improve the situation, particularly over the long term. LIMITS ON FILING BANKRUPTCY REPEATEDLY AND ON AUTOMATIC STAY. After a prior Chapter 7 bankruptcy discharge, a debtor must wait 8 years to file another Ch.7 or 4 years to file Ch. 13. After a prior Ch.13 bankruptcy discharge, debtor must wait 2 years to file another Ch 13 or 6 years to file a Ch. 7. If a case if filed within 1 year after dismissal of a prior case, automatic stay will terminate within 30 days unless court finds a case was filed in good faith. If there is a third filing within 1 year, there is no automatic stay unless affirmatively imposed after finding that case was filed in good faith. HOW MUCH DOES IT COST TO FILE BANKRUPTCY? The court filing fee is $209.00. The court may allow you to pay the filing fee in installments. Attorney’s fees start at about $700.00 and may be more, depending on the case and the attorney. HOW DO I FIND A BANKRUPTCY ATTORNEY? Perhaps a friend, a co-worker, neighbor, or relative can recommend an attorney. You can refer to the yellow pages of the telephone book. Or, you can obtain a referral to a private paid attorney through the nonprofit Travis county Lawyer Referral Service (512-472-8303) or request a Chapter 7 private attorney list. HOW LONG DO I HAVE TO WAIT BEFORE FILING BANKRUPTCY AGAIN? For a Chapter 7 debtor, a consumer will have to wait six years before filing another Chapter 7 bankruptcy, or four years to file Chapter 13. That means that if another emergency arises, such as large medical bills or a long-term loss of employment, the consumer will not be able to seek a discharge of debts. For a Chapter 13 debtor, the consumer must wait two years before refiling.
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WHAT OTHER CHANGES GO INTO EFFECT IN OCTOBER? Debtors will need to receive “credit counseling” within 180 days before filing bankruptcy, although the debtor can file for an exemption; Debtors will need to complete an educational course concerning personal financial management; Debtors will not be able to discharge domestic support claims, taxes the debtor should have withheld, fraudulent, unfiled or late filed tax obligations, fraud claims, unlisted debts, defalcation debts, long term debts, student loans, DUI fines, criminal restitution and criminal fines, restitution or damaged from a civil action due to willful or malicious injury to a person. § 1328(a)(2); Chapter 13 debtors will need to stay current on domestic support obligations and must file tax returns. Tenants may be evicted during the bankruptcy. Attorneys who receive compensation for representation of debtors with primarily consumer debts who have non-exempt property of less than $150,000 are defined as debt relief agencies and have substantial statutory duties WHAT EFFECT WILL FILING BANKRUPTCY HAVE ON MY CREDIT? In the short term, a bankruptcy filing may make it difficult to get credit, or to get credit at a low interest rate. However, a consumer with a great deal of debt and late payments may face the same difficulty. A bankruptcy filing will show on your credit report for ten years. WHEN IS BANKRUPTCY A GOOD IDEA? Bankruptcy might be a good idea for you if: • • • • • • • Debts are too large for you to pay off in a reasonable time but your regular income would pay all post discharge debts. A loan company is obtaining a court order to repossess your household goods. Your home or other real estate has been or may soon be posted for foreclosure sale. You have a large utility debts and the utility company is threatening to shutoff your utility service. DPS is threatening to take away your driver’s license because you owe someone money from an uninsured auto accident. A creditor wants to repossess collateral (such as a car) and is unwilling to work with you. IRS has garnished your wages or is going to take your home, car, or other property.
WHEN IS BANKRUPTCY NOT A GOOD IDEA? Bankruptcy is not a good idea if you do not have a regular source of income able to pay the debts remaining after a discharge and own no property your creditors can take under Texas law.
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Bankruptcy is not the right tool if all your debts are fully secured by security interests and your income is not sufficient to cure a default or fund a Chapter 13 payment plan. SHOULD I FILE BANKRUPTCY NOW OR WAIT? It is usually best to wait as long as possible before filing bankruptcy. Debts incurred after you file bankruptcy cannot be gotten rid of in the bankruptcy. You wish to take advantage of the one time fresh credit start provided by a bankruptcy. Of course, in some cases prompt action may be necessary to prevent foreclosure, repossession, eviction, or a utility shutoff. It makes good sense to wait and see if you need a bankruptcy. Many unemployed people wait until they go back to work, for example before considering bankruptcy. ARE THERE ALTERNATIVES TO FILING FOR BANKRUPTCY? Numerous alternatives to filing for bankruptcy may exist. For example, some lenders have offered in the wake of the hurricane to forgive late payments for certain periods of time, among other arrangements. A consumer credit counseling agency may be able to help you. Filing bankruptcy should be considered carefully.
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