Frequently Asked Questions:
What is bankruptcy and how does it work?
Bankruptcy is a legal procedure set up to adjust the legal rights of parties in a Debtor-Creditor relationship. In general, the bankruptcy code is a federal law that allows you to deal with your creditors in a manner that is intended to permit you to get a fresh start or to better afford the debts that you have.
Here are some of the types of things that might be accomplished by filing bankruptcy, depending on your financial situation:
a. eliminate your obligation to pay certain debts, such as credit cards,
medical bills and consumer loans;
b. stopping creditor harassment;
c. stopping garnishments;
d. ending lawsuits that are filed against you;
e. stopping foreclosure of your home or repossession of cars.
What is the difference between a Chapter 7 bankruptcy case and a Chapter 13 bankruptcy case?
A Chapter 7 case is designed to allow you to eliminate most unsecured debts, such as credit cards, medical bills, and other consumer debts. If you have secured loans, such as a car payment or a house payment, these loans should be current at the time you file a Chapter 7 case, because a Chapter 7 case generally will not change the rights of these secured creditors if you want to keep the collateral for these loans. Most people who file a Chapter 7 case continue paying on their cars and houses, and are only seeking to eliminate their credit card debt or medical bills.
A Chapter 13 case is designed to facilitate a structured repayment over time to your creditors, which will usually be much more affordable to a person than if he/she was not in bankruptcy. The three main reasons that a person might want to file for protection under Chapter 13 are:
1. Foreclosure - You are behind on your house payments or car payments and the creditor is threatening to foreclose. This is the most common reason that most people chose to file Chapter 13 bankruptcy. Once you become delinquent in your mortgage payments, most mortgage lenders are not willing to work with you, or are not willing to agree to terms that you can meet. If you are not able to catch up the entire past-due balance according to their terms, most mortgage lenders will accelerate your note (meaning that the entire amount of the loan will be due instead of only the amount that you are behind on the loan), which will make it impossible for you to be able to save the home from foreclosure. By filing a Chapter 13 bankruptcy case, you will have up to five years to catch up the mortgage loan, by paying the amount that you are behind (known as “pre-bankruptcy arrears”) as part of a single bill consolidation payment which is paid to a trustee, who in turn pays your bills for you. Upon completion of your Chapter 13 plan, your mortgage loan is then reinstated. You will have to keep current on your regular monthly house payments that come due after the bankruptcy is filed to avoid losing the house - so you must make enough money to pay your regular monthly house payment and your bankruptcy debt consolidation payment. Please consult our office to determine how much your consolidation payment might be if you file a Chapter 13 bankruptcy case.
2. Prevent loss of assets - There are times that a person might own assets that are not exempt, meaning that you own certain assets that can be taken from you if you file a Chapter 7 bankruptcy case (See “What assets can I keep” below). To prevent the loss of these assets, many people will chose to file a Chapter 13 bankruptcy, which will allow you to keep these assets so long as the creditors are paid at least what they would have received if the non-exempt assets were taken from you and sold. You will have up to five years to pay this amount, which greatly increases the likelihood that you will be able to make your bankruptcy plan work. This law, which is referred to as the “liquidation test”, was made to ensure that creditors would receive the benefit of an asset that could have been sold in a Chapter 7 case, while allowing you to keep the asset if you desire. If you have non-exempt assets, please do not hesitate to contact an attorney at our office who can determine what you would likely have to pay to keep these assets. Finally, please be advised that if an asset is not exempt in bankruptcy, it is also not exempt outside of bankruptcy. So if you don’t file the bankruptcy case, you can lose these assets to a creditor without having the chance to save them.
3. Higher income - Some people are required to file a Chapter 13 bankruptcy case if their incomes are too high to qualify for a Chapter 7 bankruptcy case. In order to qualify for a Chapter 7 case, your income over the last six (6) months is averaged and compared against the median family income in your state for your family size. If you are over the median family income for your state, a form is completed to determine how much you will be required to pay back, if anything, to your unsecured creditors. you are not allowed to have enough disposable income left over each month to make a meaningful payment to your creditors over five years. It is very important that you consult with Mr. Hervol to determine whether or not you qualify for a Chapter 7 case. However, even if you do not qualify for a Chapter 7 case, and it is determined that you must file a Chapter 13 case, we can usually set up a Chapter 13 bill consolidation payment for you which is much more affordable than the payments you are required to make to creditors outside of bankruptcy.
What debts are affected by the bankruptcy case?
When you file a bankruptcy case, you are generally seeking a “discharge.” A discharge is a Court order which states that you do not have to pay most of your debts.
Almost all of your debts will be affected in some way by the bankruptcy filing; however, in general, you cannot discharge the following obligations:
-child support/alimony
-most taxes (there are exceptions for certain income taxes that are at least 3 years past due)
-most student loans (there is a “hardship discharge” exception that you may discuss with the attorney)
-court fines and criminal restitution
-damages for injuries you cause a person while driving drunk or under the influence of drugs
The discharge only applies to debts or obligations made BEFORE the date the bankruptcy was filed. If a Judge finds that you incurred a debt dishonestly or that you received money or property by fraud, the particular debt might not be discharged. Also, a Judge can deny your entire bankruptcy discharge if you do something dishonest in connection with your bankruptcy case, such as hiding assets, falsifying records, lying on the papers that you file with the Court, or refusing to obey an order from the Court.
Do I have to go to Court?
Most bankruptcy clients do not ever see a bankruptcy judge. In the overwhelming majority of Chapter 7 cases, the cases are resolved without the Debtors being required to appear before a judge. Only one appearance at the meeting of creditors with your attorney is typically required. The exception is for cases where a contested matter is brought by a bankruptcy trustee, the U.S. Trustee or a creditor.
With most Chapter 13 cases, the Debtors are not required to appear before a bankruptcy judge unless the Debtors do not fulfill an obligation required by their Chapter 13 plan, or unless a creditor objects to the plan and the matter is not resolved by agreement.
What if I owe money to the Internal Revenue Service?
Bankruptcy is a viable way to deal with obligations due and owing to the Internal Revenue Service. In general, such obligations are not disachargable. However, if certain conditions are met, such debt may be disachargable. In the event that certain tax obligations are not disachargable, a bankruptcy reorganization case will typically afford you an opportunity to repay the tax debt without incurring further penalties and interest on the underlying tax obligations, and with the protection afforded by the bankruptcy code from seizures, levies and other collection actions.
Can I get rid of child support obligations?
No. Congress has provided that these obligations are never dischargeable in bankruptcy. You can, however, repay child support arrears through a bankruptcy reorganization case such as a Chapter 11 or 13 case. As long as you keep your payments current in these cases (and also remain current on any regular child support obligations), you will generally be protected from the individual or child support agency to whom you owe the support.
Can I get rid of student loan obligations?
As a general rule, you may not discharge student loan obligations. The bankruptcy code does contain an exception to this rule, however, called a “hardship discharge.” It is very difficult to qualify for and obtain a hardship discharge of your student loans. If you have any questions on whether or not you might be able to discharge a student loan, please contact our office to discuss your situation in detail.
Can I keep certain debts?
You are required by law to list all of your debts in a bankruptcy case. You may, however, select certain debts to keep, so long as both you and the creditor agree to this arrangement after the case is filed. This process is known as a “reaffirmation of debt.” After you file a Chapter 7 case, you may sign a document call a “reaffirmation agreement” which is a document stating that you will continue to be liable for the debt. These agreements are usually signed with your secured creditors, which are creditors that have certain of your assets pledged as collateral for their loans. Examples include your home loan or your car loans. Some of your unsecured creditors may also be receptive to allowing you to reaffirm a debt; however, this occurs very infrequently.
If I file bankruptcy, will I lose my assets?
As a general rule, filing bankruptcy should not cause you to lose the essential assets that you need to live. For a list of specific assets which should be protected, see the answer to the next question. Please further note that if an asset is secured by a debt, you must continue to pay the debt to keep the asset. For example, you cannot file bankruptcy and keep your house without continuing to pay your mortgage, and you cannot file bankruptcy and keep your cars without continuing to pay your car payments and providing the insurance required by your contract with the car finance company.
What assets can I keep?
In general, Debtors who file bankruptcy and are residents of the State of Texas are allowed to keep the following assets:
1. A house and other improvements on 10 acres of land or less (200 acres if you live in a rural area)
2. One motor vehicle per licensed person in a household
3. $50,000 per spouse worth or personal property, from the following categories:
-home furnishings, including family heirlooms
-provisions for consumption (i.e. food)
-farming and ranching vehicles and implements
-tools and equipment used in a trade or profession
-clothing
-jewelry (up to $12,500 per spouse)
-two firearms
-sporting equipment
-motor vehicles
-a certain number of farming animals and household pets
4. All of your retirement
5. All of you life insurance
You may also be able to keep a certain amount of cash, money in the bank, stock, bonds or other assets depending on how much equity you have in your home. Please consult one of our bankruptcy attorneys to find out for sure.
A large majority of people who file a Chapter 7 bankruptcy do not have assets that exceed the amounts shown above. Therefore, most people who file Chapter 7 bankruptcy are allowed to retain all of their assets, so long as they continue to make their car and house payments.
What if I filed bankruptcy previously - can I file again?
There is no limitation in the bankruptcy code on the number of times a person can file bankruptcy during their lifetime. However, the following factors limit how many times a person can file:
a) The law allows a bankruptcy judge to dismiss a bankruptcy case if the person has filed abusively. If you have been involved in another bankruptcy case within the last twelve (12) months, you must petition the court for protection from your creditors and have a hearing within thirty (30) days of filing a new cases. If you have filed several cases, the Court might dismiss your case if circumstances warrant such dismissal. For example, there have been cases where Debtors file multiple Chapter 13 cases to stop foreclosure sales against their home, and do so without any reasonable intent or ability to catch up the payments on the home. This is an example of the type of case that could get dismissed for abuse;
b) A person can only receive one discharge of debts every eight (8) years. If you received a discharge previously in another case, you must wait eight (8) years from the date of the filing of the last case to file the new case.
If you have previously filed a bankruptcy case and have questions about whether or not you can file again, please contact our office.
Do I have to list my house and my cars on the bankruptcy?
Yes. The bankruptcy code requires you to list all assets and all liabilities on your bankruptcy, even if you want to keep those assets and even if you want to pay those debts. Please note, however, that just because you are required to list those assets does not mean that you will lose them, and even though you are required to list all of your debts does not mean that you have to discharge all of your debts.
What if one of my debts has a co-signer, or the debt is in my name and the name of somebody else?
When you file a bankruptcy case, only you may seek a discharge of debt. Thus, your co-signer will not be discharged as a result of your bankruptcy filing, unless your co-signer also files a bankruptcy case. It is very important to note, however, that not everyone who is listed on an account with you is necessarily a co-signer. The person listed on the account with you might only be an authorized user, in which case the creditor would not be able to look to that person for payment of the debt.
How much does it cost to file bankruptcy?
Fees for bankruptcy cases vary depending on the chapter of the Bankruptcy Code under which you need to file, the types of debts you have, and whether or not your case is likely to be contested or relatively straightforward. All initial bankruptcy consultations at our office are absolutely free. Therefore, you should not hesitate to consult our office, discuss your situation (without the obligation to hire us), and then we will be able to quote you an appropriate fee based upon the facts and circumstances that are particular to your needs.
How much experience do you have with bankruptcy cases?
Mr. Hervol has been representing clients in bankruptcy court for more than 26 years. Mr. Hervol also performed a judicial clerkship for the United States Bankruptcy Court for the Western District of Texas, San Antonio, Division, from 1992-1993. Mr. Hervol has represented more than 3000 individuals and business entities since the time his clerkship expired with the court, and has been actively involved in adversarial and contested matters before the bankruptcy courts.
What will filing bankruptcy do for me?
In general, filing bankruptcy could help you to live your life free from interference from the past financial mistakes you might have made. If you are in danger of losing an asset secured by a loan to a creditor, filing bankruptcy might be able to help you to save or keep the asset by giving you time to catch up back payments, or by making the payments more affordable. During our initial appointment with you, we will show you in dollars and cents how filing a bankruptcy case could affect your overall financial picture.
If I file for bankruptcy relief, how will it affect my credit?
Filing for bankruptcy relief will adversely affect your credit. Further, pursuant to the Fair Credit Reporting Act, the credit reporting agencies are entitled to report the bankruptcy on your credit report for as much as ten years. However, there is a large misconception about the effect of the bankruptcy filing on your overall credit score. Many people who file for bankruptcy relief already have a very low credit score, or are about to be in a position of having a low credit score as a result of not being able to repay all of their debts on time each month. Filing for bankruptcy relief can give these individuals the opportunity to at least discharge these bad debts, and attempt to re-establish good credit. It is a sad reality in the credit industry that people can pay all of their debts in full and on time each month for years, and then find themselves in a position where they have bad credit simply because they might not have been able to continue to pay all of their debts for a certain period of time, even if it is for a relatively short period of time.
What if I have a lot of debt that I cannot pay, and I don’t file for bankruptcy?
If you do not pay your debts and you do not file for bankruptcy, you will have to deal with your creditors without any protection from the Courts. This places you at a serious disadvantage. When debts become delinquent, creditors take different approaches to try to collect on their debts. The following are some of the actions that your creditors may take against you if you choose to do nothing:
1. File Lawsuits/Take Judgments -
When you made your debts, you either signed a promissory note or used a credit card or other form of open or revolving credit and agreed to be bound under the terms of a cardmember agreement. These documents state that you promise to pay the debt. When you don’t pay the debt, or don’t pay it according to the agreed upon terms, creditors may file lawsuits against you. As a general rule, creditors have 4 years from the date you first represented an intention to not pay the debt to file suit against you seeking a judgment on the debt. When creditors file lawsuits against you, it can create big problems for you. The following are the types of things that can hurt you when a creditor files suit:
a. If the lawsuit results in a judgment, a judgment will negatively affect your credit score;
b. If you want to contest the suit, you will incur attorney’s fees;
c. If the creditor gets a judgment against you, they can attach or take any non-exempt assets that you might own;
d. If you are a Texas resident, a creditor who gets a judgment against you cannot garnish your wages as a general rule; however, judgment creditors can garnish (or seize) your bank accounts and can serve you with a turnover order that will force you to turnover all of your future income tax refunds to the creditor until the debt, attorney’s fees, court costs and accrued interest are paid in full;
e. A judgment creditor can file an abstract of judgment in the county deed records which will place a “cloud” on the title to your home. This could make it difficult to sell your home or take out a loan against your home. Further, if you do not own a home, the existence of an abstract of judgment filed in the deed records will prevent you from being able to purchase any real estate at all, as title companies will not issue a title policy on the property unless the judgment is cleared up (i.e. paid and settled). Finally, any real estate you own other than your homestead can be seized and sold by the judgment creditors to satisfy their debts.
2. Engage in Collection activity -
Creditors are permitted to collect the debt, so long as the actions they take do not violate the law. Unfortunately, many of our clients report to us that creditors and collection agencies routinely violate these laws. Most notably, collectors make threats that are not grounded in law (such as, “if you don’t pay, we’ll take your house” or “we’ll garnish you wages”). Many clients have advised us that they would not have filed bankruptcy but for the rude and aggressive collection tactics used by some of their creditors. For many, life is simply too short and too difficult without having to endure communications from creditors which are threatening, belittling, and unprofessional.
3. Cause you to pay federal income taxes on "income" you didn't receive-
Many clients will ask, "if I don't have anything the creditors can take and the harassment really doesn't bother me, then why should I worry about having judgments and owing a lot of debt?". The answer is that a creditor can cause you severe federal income tax problems once it decides that the debt is not collectible. If you owe a debt to a creditor who cancels or "forgives" all or some of the debt, you are treated as having received "income" in the amount of the debt "forgiven" for federal income tax purposes. This may result in you having to pay federal income tax on this "income" that you didn't really receive unless certain limited exceptions apply. One of those exceptions is for individuals who successfully discharge the debts in a bankruptcy case. When the debt is discharged in a bankruptcy case, you are generally permitted to exclude the phantom "income" from your taxable income for that particular tax year, thereby preventing the problem of having to pay federal income taxes on the "forgiven" debt. For more information on this topic, see the following links:
https://taxpayeradvocate.irs.gov/get-help/cancellation-of-debt
https://www.irs.gov/taxtopics/tc431
4. Negatively affect your credit - Creditors who you do not pay can continue to report the delinquency to the credit reporting agencies, thereby affecting your ability to get new credit.
5. Follow you to your grave -
This might sound ominous, but unfortunately, it’s true. If you die owing money, your creditors might be permitted to collect their debts from the assets you own at the time of your death. When a person dies, their property passes into an entity known as their estate or their probate estate. The probate court appoints a representative to handle the affairs of the estate. When you make a will, you can select who you want to handle the estate. When you die without a will, the Court may select someone to handle the estate. If noone comes forward to handle the estate, a creditor can request that the probate court set up an estate and appoint someone to handle the job. By law, creditors are allowed to assert their claims against your estate when you die. Certain types of property might qualify as exempt from your creditor’s claims; however, if an exemption does not apply, the creditors may go after your non-exempt assets in your probate estate. This would deprive your heirs from being able to realize all or a portion or their inheritances that you wanted them to have at the time of your death. On the other hand, if you file bankruptcy while you are alive, you can attempt to discharge those debts, thereby ensuring that your heirs can receive their inheritances. Many people realize this. In fact, our firm is contacted by many recent retirees about filing for bankruptcy. When people retire, they realize that their incomes will usually decrease, and that they may no longer be able to afford their debts. More importantly, many retirees realize that they will never be able to pay off their debts by making only the minimum monthly payments required on their accounts - especially when one considers the exorbitantly high interest rates that many creditors charge on consumer credit accounts. Thus, bankruptcy is a viable alternative allowing elimination of these debts, and preserving the retired persons’ rights to leave their estate assets to whomever they wish, free from the claims of creditors.