Dallas Bankruptcy Blog

 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. 

Approximately 30-60 after a debtor files for a Chapter 7 or Chapter 13 bankruptcy, they have to attend a Meeting of Creditors. 

The name is misleading because it implies that you’re going to sit down at a table with all of your creditors, which many people believe occurs in a courtroom.  In reality, it is extremely unlikely that any of your creditors will show up for this meeting and it often takes place in an office. 

The purpose of this meeting is really for the bankruptcy trustee to review your schedules and question you under oath regarding the filing of the bankruptcy case.  Once you receive the notice of this meeting you will attend with your bankruptcy attorney (if you were lucky enough to file with one), and be asked questions regarding your case. 

Some common questions are, “Did you read and review all the bankruptcy schedules before you signed them?  Are they true and accurate to the best of your knowledge?  Did you list all of your income, expenses, and debts?” 

The purpose of this is to verify the accuracy of your bankruptcy schedules, to make sure that you have not attempted to defraud the court, and that you’re not purposing to file a bankruptcy plan that is not feasible or practical. 

Also, in the case of Chapter 7 liquidation bankruptcy, to verify that you are eligible to file and that you haven’t transferred any property in contemplation of filing. 

Typically, this meeting is the only meeting that a debtor will have to attend.

The third most common reason for bankruptcy filing doesn’t have to do with a loss of income or medical illness, but instead the deceptive practices of the credit card industry.  People who have been lured in by such practices never meant to get in over their head - but slowly, over time, their debt has been building.

This phenomenon can easily be explained by the analogy of the frog and the pot.  If you drop a frog in a pot of boiling water, the frog will immediately jump out because it is hot. However, if you put the frog in some lukewarm water and slowly raise the heat, the frog will never jump out.  It will simply boil to death because it can’t sense the temperature slowly rising. 

That is what the credit card industry does to consumers.

Many credit card companies reel you in with the promise of a 0% interest rate and no payments for six months.  Then, God forbid, you miss a payment or are late - and suddenly that 0% interest becomes 27%. 

Now you can’t even afford to make the minimum payments.  Every payment you make is strictly interest. After that, the debt doesn’t go down.  You may find yourself having to make payments for the next thirty years in order to pay it off. 

What happens when the car breaks down or you get sick?  Filing for bankruptcy may be your only way out.

A very common reason for bankruptcy filing is medical illness.  The cost of healthcare, even for people who are lucky enough to have insurance, can be astronomical these days. 

If you are unfortunate enough to be diagnosed with a terminal illness, or even just an injury that requires you to be hospitalized, you are probably going to experience a reduction in income.  You may even lose your job. 

In addition to this loss of money, you also have to bear the cost of your medical treatment.  A one-night stay in a hospital can yield an unbelievable bill. 

What happens when it’s for a week or two, or more?

Let’s say you don’t have medical insurance but you still want to get top quality medical care. Most of the time the only choice a person has is to turn to credit cards.  They put the cost of their treatment on a credit card in order to get well, only to find later that they can’t afford to pay it back. 

This is the number two leading cause for bankruptcy filing.  These are not bad people.  No one wants to get sick!  Filing for bankruptcy may be the only available option for financial survival.