Dallas Bankruptcy Blog

You’ve just been served papers by a creditor for not paying on your debt. Now what?

Being sued by a creditor should be taken seriously because there are implications and consequences to this action.  It can be scary to be served legal papers.  It can also be quite embarrassing if you were served at your place of work or at home in front of your neighbors.  It’s a frightening thought for those not experienced with the legal process. 

However, you do have rights when you’re being sued.  It’s important to know what a creditor can and can’t do to you.  Once you’ve been served you have a certain number of days to respond by filing an answer. 

This is where you get to explain your side of the story. 

You could respond with a general denial, where you simply deny the allegations in as little as one sentence, or it can be a specific denial where you line by line address the issues. 

If you do not file a response the person suing you can obtain a default judgement. 

It is presumed after a certain number of days with no response that you do not dispute the allegations.  It also says that the party suing you is entitled to a judgement.  Filing a response will allow for a hearing, during which you can plead your case. 

Whatever you do, make sure you know your rights.  An attorney might be necessary. 

Can creditors garnish wages? 

The answer depends on what state you live in.  In Texas, the answer would be no.  Most wages are protected from garnishment under Texas law.  Your wages are yours, free and clear.  So if you get behind on a credit card, a signature loan, or any other type of private debt in Texas, you’re not going to have your wages garnished. 

This does not hold true for many other states, however.  There are plenty of states that do garnish wages for debt, private or otherwise. 

Government and government-related debts are susceptible to garnishment in Texas and just about anywhere else.  Child Support, IRS debts, overpayment on social security or taxes, and other similar circumstances will also be taken directly out of your paycheck in most states.  State garnishment laws do not protect these types of debts. 

Even if your state does have protection from wage garnishment in cases of private debt that does not mean that all your assets are protected.  Some states allow property seizure and other forms of forced collection. 

If you’re behind on your debt, you may want to look into where your state stands on wage garnishment and property seizure.  Consider hiring an attorney if you’re concerned about your assets. 

Is it possible that not paying on your debts could land you in jail?  The answer is no. 

Unfortunately there are some unethical creditors and debt collectors out there that make inaccurate and illegal threats.  There is no debtors’ prison.  A long, long time ago people were put in jail for not paying on their obligations, but our thoughts on debt have evolved over the years. 

It’s now understood that you shouldn’t keep people in jail just because they can’t pay their debts.  Doing so would mean they could no longer be productive citizens, earn income, reestablish their lives, or ever hope to pay anyone back.  You will never be put imprisoned for not paying your debts. 

However, if some sort of fraudulent or criminal activity has taken place it’s a different story.  Falsifying financial statements or other illegal activity undertaken in order to acquire credit could result in criminal action.  But if you have been honest in your applications for credit or loans then simply find yourself unable to pay it, that’s not illegal.  So what can creditors and lenders do when someone has acquired debt but failed to pay? 

There is some legal recourse.  If they have attempted to collect and been unable to do so they are within their rights to sue you.  This may result in a judgement from the courts saying that you are in fact responsible for what you owe, but no one is going to send you to jail. 

Those days are over. 

 What happens when only one spouse files for bankruptcy?  First, we have to understand the background behind the situation.  How was the debt incurred?  What is the financial relationship between the spouses?  Just because you’re married it does not necessarily means that you both owe on the same debts. 

The debt and property you acquire before you are married are considered separate.  People often come into a marriage with their own individual debt load.  Once you are married any debt or property acquired from that point forward, either individually or as a couple, is considered community property and community debt. 

Let’s say a husband wants to file for bankruptcy, but his wife is totally against it.  They’ve only been married a short time and she had a very pristine credit record prior to getting married and still has little debt in her name.  For the husband, it is the opposite.  He’s in over his head and needs help to get out.  Knowing his debt was considerable, they chose to keep separate accounts.  She never became a co-debtor. 

All this considered, when he files for bankruptcy it should have zero effect on her credit.  It is illegal for the credit card companies to hold her husband’s bankruptcy against her.  Of course, had they acquired any property while married it will have to be disclosed in the filing. 

Even so, her credit remains clean.  Her report would simply say that her co-debtor had filed for bankruptcy, not her.

Many people have the misconception is that the government is going to come and seize all their property once their debt is discharged through bankruptcy. This is simply not true.

Most people that file for bankruptcy keep all of their property. The reason they are able to do this is because there are exemptions provided under federal and under state law that protect property. The laws contain notations that allow people that are insolvent to keep certain pieces of property, like the Homestead Exemption clause.

For example, the Homestead Exemption in Texas allows people who have paid off their property to keep that house regardless of its value. In addition, the law in Texas allows you to keep one vehicle per licensed driver and certain household goods, such as furniture, electronics, and personal knickknacks.

Texas does not allow you to exempt cash, but since Texas allows for federal exemptions as well, a person can choose which exemptions they want to adhere to, the state or the federal.

Under the federal laws, you can exempt a portion of the equity in your home. It’s not limitless like in a state exemption - however, if you don’t have excess equity in your home the federal exemption can be used as a sort of a wild card.

This would allow you to apply the exemption toward anything - like cash - which normally would not be allowed. Simply put, filing for bankruptcy won’t require giving up everything you own, thanks to state and federal exemptions.

When you file for bankruptcy, it is a negative connotation on your credit report. However, filing for bankruptcy can actually help improve your credit over an extended period of time. 

One of the factors lenders look at when deciding to loan people money is the applicant’s debt to income ratio.  This is a percentage based on how much you make vs. how much debt you have.

After filing for a Chapter 7 bankruptcy all of your debts are discharged, instantly improving this ratio and making you more attractive to lenders.

In addition to reducing your outstanding debt, all of your negative payment history reports are eliminated.  Where it once said you had late payments, the slate is now is wiped clean.  Your credit report will now say only that the debt was discharged due to bankruptcy. 

Creditors know that people file for bankruptcy.  In fact, more people file for bankruptcy than contract cancer or get a divorce each year.  Surprised?  Don’t be.  There’s a significant amount of the American population doing this and the credit industry cannot afford to simply ignore that market. 

Another reason why your credit can actually improve after filing for a Chapter 7 bankruptcy is that you are barred from filing a new bankruptcy case for a period of eight years.  Creditors know that once you have received a discharge and they loan you money, you’re not going to be able to turn around and immediately file again. 

Most people who acquire debt have paid back the original amount borrowed several times over.  They’ve been paying mostly interest.  Trust us - lenders don’t mind getting you right back into that cycle.  

If your house has already been foreclosed on, is there any reason to still file for bankruptcy? 

The answer is unequivocally Yes. You may still want to consider filing for bankruptcy after foreclosure because you may have a deficiency balance.  What’s that?  A deficiency balance is the difference between what you still owe the creditor and what they sold it for at the auction. 

For example, say you bought a house for which you borrowed $100,000.  At the time of foreclosure you still owed $80,000 on it - but it only sold for $50,000 when they auctioned it off.  The mortgage company just lost $30,000 and you just received a financial windfall on that debt. 

This is a deficiency balance.   It’s money that the lender couldn’t recoup even after the sale of your home. 

You aren’t responsible for paying this deficiency balance; the mortgage company will forgive the debt and write it off.  Unfortunately, it is a financial windfall in they eyes of the IRS - and you will still have to pay taxes on it as if it were income. 

The money the bank forgave you is listed on a 1099 tax form, just as if they wrote you a check for it.  Now you owe taxes on income from a house you couldn’t even afford and no longer have. 

In this case, if you file for bankruptcy before the creditor files the 1099, then you are able to discharge that deficiency balance.  Filing for bankruptcy will help you avoid what could be a serious tax liability. 

A reaffirmation of debt is only a good idea when you get something out of it, like keeping a good car or the home you live in.   If you get a reaffirmation agreement for an unsecured debt, like a major credit card, it defeats the entire purpose of filing for bankruptcy. 

You went through the process in order to get a discharge of all your unsecured debt.  It wouldn’t make sense to reaffirm it.  This would make you once again responsible for that debt, a debt you were unable to pay and was your reason for filing in the first place.

It’s also probably not a good idea to sign a reaffirmation of debt on an old or unreliable vehicle.  If you are stuck driving a lemon, or even just a car that you don’t really like, chances are you would rather get a new one. 

Don’t sign a reaffirmation agreement in this case. 

You can simply allow this to be discharged like any debt under a Chapter 7 bankruptcy would be.  Of course you won’t be able to keep the car, you’ll have to give it back to the creditor.  Is that such a bad thing though?  Your debt on the car would be discharged and you would no longer be stuck with any kind of deficiency. 

Reaffirmation of debt is sometimes a good idea, but be sure to fully weigh the pros and cons before you sign anything.

When you file for a Chapter 7 bankruptcy, all of your contracts and debt are voided out. 

It’s that powerful. 

It will wipe out your financial responsibilities for everything.  But there are some types of debt that you may want to keep, for example, your car or your home. 

Let’s say that you have found yourself filing for a Chapter 7 bankruptcy because you can’t afford all your credit card bills and now you’re behind on everything that you owe.   You’ve got a good car though that you found at a great price.  After completing a Chapter 7 filing, if you miss one payment or are already behind on your car, the creditor isn’t going to help you out one bit.  You car will likely get repossessed. 

However, with all your debt wiped clean, you can now afford to make all your future payments.  In this case, you should reaffirm that debt.  This would mean that you would sign a reaffirmation agreement prepared by your creditors and file it with the court. 

What this does is revive the terms of your car note.  This same situation can also be applied to keeping your house.

 A reaffirmation of debt can only occur under a Chapter 7 bankruptcy filing.  There is no process to reaffirm debt under a Chapter 13, since your debt is not wiped out the way it is in a Chapter 7 bankruptcy.

What is the difference between a bankruptcy case being dismissed and discharged?  It is common to confuse these two terms in reference to bankruptcy proceedings.  One of these is positive, while the other is negative. 

You may not be able to guess now which is which, but it’s important to know that if your bankruptcy case is dismissed, it is not a good thing. 

In order to get the full benefit of a bankruptcy case and the lasting effects of wiping out all of your debt you must receive a discharge.

In contrast, if your case is dismissed that means that your case was unable to complete the process.  It may have been dismissed because you failed to file all of the proper paperwork.  It may have been dismissed because you didn’t make your planned payments as required by a Chapter 13 bankruptcy filing. 

It could have been dismissed if you did not attend the required Meeting of Creditors.  Whatever the reason, if you are dismissed your debts will not be discharged.  You will still be responsible for all your payments and all your penalties and interest will be reassessed. 

It’s very important to understand the difference between these two potential outcomes and work towards a positive one.  The best way to avoid a negative outcome is to hire a competent bankruptcy attorney to help you through the bankruptcy process and ensure your debt is properly discharged.