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Rush S. Wells, P.C. - Lubbock Texas Attorneys

Ratliff & Wells
P.O. Box 888
Littlefield, Texas
Phone: 806-385-3302
Fax: 806-385-4518
Ratliff & Wells
P.O. Box 5741
Lubbock, Texas
Phone: 806-765-7711
Fax: 806-763-5574

What is Bankruptcy?

Bankruptcy is a federal law which provides relief from debt.  It is a recognition that sometimes a person’s debts are simply more than they can pay and still maintain a reasonable standard of living.  Bankruptcy provides a way to stop creditors from trying to collect those debts.

 What is the requirement to file Bankruptcy?

 You must be “insolvent” in order to file Bankruptcy.
 
“Insolvent” means EITHER:

  1. Your debts are greater than your assets which a creditor could seize if it took a judgment; or

  2. You are not able to meet your financial obligations as they become due.

Is Bankruptcy new?

 No.  Since 1800 this country has had formal bankruptcy laws for the benefit of U.S. residents. The current Bankruptcy Code was adopted in 1978, providing a major overhaul of the bankruptcy system. The very first Article of the Constitution of the United States (in Section 8), gives Congress the power to establish laws on the subject of bankruptcies throughout the United States. The framers of the Constitution wanted to insure that the "debtor’s prisons" of colonial times, in which individuals could be imprisoned for their debts, would never again exist in this country.  They knew that every man, woman, or child could reach a point at which there was no “way out” except for the extraordinary powers which could give such person a “fresh start.”

Can I get fired from my job for filing bankruptcy?

No. 11 U.S.C. sec. 525 prohibits government units and private employers  from discriminating against you because you filed a bankruptcy petition or because you failed to pay a dischargeable debt. 

Can I go to jail if I file bankruptcy? 

No. There are no debtor's prisons in the United States. 

How does Bankruptcy protect me?

 Filing Bankruptcy provides a way to stop all creditors, including the IRS collection procedures for a period of time.  Bankruptcy Code §362 grants debtors automatic relief from collection activity, and applies to the IRS in the same manner as other creditors. The period of relief depends on many factors, including whether the tax payer files for relief under Chapter 7, 11 or 13.

What kind of debts can I get rid of (called a discharge)?

Generally speaking, unless the Bankruptcy Code says a particular type of debt cannot be “discharged” any debt can be discharged.  Some examples of debts which can’t be discharged are:

  1. Child Support and alimony

  2. Fines and restitution in criminal matters

  3. Some kinds of taxes, particularly recent taxes

  4. Debts which came about because of bad conduct or fraud on your part

 

But, other than the types of debts which the Bankruptcy Code says CANNOT be discharged, to really answer this question it is necessary to talk about the types of debts.  In Bankruptcy all debts are divided into one of three kinds:

1.      Secured debts - these are debts where the person who loaned you the money (called a “creditor”) holds a “mortgage” or “lien” on certain property (called “collateral”) to secure payment of the money owed to it.  Whether or not you will have to pay such a debt is determined mostly by whether you borrowed the money to buy the property (called a “purchase money lien” in Bankruptcy). 

a. The most common types of purchase money liens which we see are a mortgage on a home for the purchase or refinance of the home and a lien on a car or truck for the purchase of that car or truck.  A creditor that holds a purchase money lies is almost always entitled to either:

i.          Get the collateral back; or

i.          Be paid the value of the collateral.

b.         The next most common secured creditor we see is one that took a lien AFTER the collateral was purchased to secure a new debt or the refinance of another old debt (called a “non-purchase money secured lien”).  An example would be a loan company that made you “pledge” or give them a lien on something to get a loan.  If it is a simple loan from a company for personal debts and the collateral is your household furnishings (like a T.V., bed, camera, etc.) then you can probably get the Bankruptcy Court to say that the lien is no good (called “avoided”) after the bankruptcy.  Any other “non-purchase money secured liens” become much more complex and must be dealt with on a case by case basis.

2.      Priority unsecured debts - There are a number of debts that congress has said are more important and has classified as having “priority” or a greater entitlement to be paid from any assets.  These include: child support, some taxes, particularly recent taxes, money owed employees for wages, and a number of others.  The most common are taxes for the last three years owed to the I.R.S. and property taxes on your home.  There are some very technical reasons that being a “priority” debt is important.  Usually the most relevant to clients is that the priority creditors will be paid before the general unsecured creditors if there is any property that is not securing a lien.

When I.R.S. Taxes can be Discharged in Bankruptcy

Most people believe that a debt to the I.R.S. cannot be helped by bankruptcy.  Individuals may be able to discharge some or all of their older income tax obligations in bankruptcy.  Whether or not a debt to the I.R.S. can be discharged depends on whether or not the tax is entitled to be treated as a "priority" claim. Tax obligations that are no longer priority are dischargeable.

The Bankruptcy Code provides that taxes assessed by a governmental agency which are based on income (income taxes) lose their priority status when:

(a) the tax return, with all extensions, was due more than three years prior to filing for bankruptcy protection;

(b) a return was filed at least two years prior to the filing for bankruptcy relief;

(c) the tax obligation was assessed at least 240 days prior to filing; and

(d) the tax payer is not guilty of fraudulent conduct or tax evasion and has not signed an offer in compromise or other settlement agreement.

Certain penalties and interest may also be dischargeable. Penalties designed to compensate the agency for actual loss are non‑dischargeable while those which are punitive in nature may lose priority and become dischargeable. Employment taxes are not dischargeable regardless of the age of the tax claims. This is true whether the obligation arose because the debtor was the employer or a responsible officer.

This is a complex area of bankruptcy which requires, in addition to the filing of the bankruptcy, the filing of a lawsuit, within the bankruptcy, against the United States (the I.R.S. is just an agency of the U.S.) called an “adversary” suit.  It should never be taken lightly.

3.         General unsecured creditors.  These are the creditors who are owed money, don’t have a lien on any property, and are not “priority.”  They are the last to get paid and the most frequently discharged.  Some examples would be: most credit cards, medical bills and signature loans.

 Are there different kinds of bankruptcy?

 Yes.  There are four types of bankruptcies available to individual debtors, that are identified by their chapter in the Bankruptcy Code.

Chapter 7 

This is a liquidation proceeding which is available to individuals, partnerships, and corporations. The debtor is allowed to keep exempt assets (unless he or she fails to pay a debt incurred for the purchase of the asset). For individuals filing bankruptcy in Texas, the exemptions are determined by either Texas law or under the Bankruptcy Code. Texas exemptions include:

  1. The debtor’s homestead of unlimited value (in town, up to 1 acre with a home; in rural areas, up to 200 acres); and

  2. up to $30,000.00 in value a debtor’s interest in:

  1. a motor vehicle for each licensed driver in the household

  2. all household furniture

  3. a debtor’s interest in any professionally prescribed health aids and certain other assets such as the cash surrender value of life insurance policies.

  4. A number of other assets listed in the Texas Property Code which include, among other things, burial plots, certain animals, clothing and inexpensive jewelry.

There are also other exemptions for qualified retirement plans such as I.R.A.’s, 401K’s, Teacher Retirement, employer pension funds and the like - of unlimited value.

All non-exempt assets must be turned over to the Chapter 7 trustee for liquidation and distribution to creditors.

What debts can be discharged?

For individuals filing Chapter 7, most debts, including some tax obligations, are discharged (see discussion below). Some debts, including recent tax obligations, trust fund obligations, child support and alimony generally cannot be discharged. Other debts may not be discharged if the creditor can prove improper conduct on the part of the debtor.

Chapter 13

A Chapter 13 bankruptcy, or "wage earner reorganization" is available only to individuals with regular income. It requires that the debtor file a plan providing for payment to creditors over a period of up to five years. The benefits of a Chapter 13 include the ability to reinstate a home mortgage that is in default, stop IRS collection efforts while payments are made, the ability to retain non-exempt real estate and personal assets, and a broader form of discharge.

 Chapter 11

A Chapter 11 reorganization is available to individuals and businesses. Due to the higher court fees, reporting requirements and legal fees involved in a Chapter 11, it is seldom used by individuals. However, it may provide individuals and businesses with an opportunity to reorganize their debts and make arrangements to pay all or a portion of the debts, or sell the business, while obtaining protection from creditors. A Chapter 11 generally provides more flexibility than a Chapter 13 reorganization for individuals.

For individuals filing Chapter 7, most debts, including some tax obligations, are discharged (see discussion above). Some debts, including recent tax obligations, trust fund obligations, child support and alimony generally cannot be discharged. Other debts may not be discharged if the creditor can prove improper conduct on the part of the debtor.

Chapter 13

A Chapter 13 bankruptcy, or "wage earner reorganization" is available only to individuals with regular income. It requires that the debtor file a plan providing for payment to creditors over a period of up to five years. The benefits of a Chapter 13 include the ability to reinstate a home mortgage that is in default, stop IRS collection efforts while payments are made, the ability to retain non-exempt real estate and personal assets, and a broader form of discharge.

Chapter 11

A Chapter 11 reorganization is available to individuals and businesses. Due to the higher court fees, reporting requirements and legal fees involved in a Chapter 11, it is seldom used by individuals. However, it may provide individuals and businesses with an opportunity to reorganize their debts and make arrangements to pay all or a portion of the debts, or sell the business, while obtaining protection from creditors. A Chapter 11 generally provides more flexibility than a Chapter 13 reorganization for individuals.

Priority and non-priority taxes can be treated in a Chapter 11 or Chapter 13 plan and paid out over time. The bankruptcy stay remains in effect until the Plan is completed or the case dismissed. This may allow a business which has been seized by the IRS to re‑open and operate under a Chapter 11 Plan without interference from the IRS or other creditors. The filing of a Chapter 7 stays all collection proceedings until the entry of a discharge or dismissal of the case.

What should I do to prepare for filing bankruptcy?

First, see an attorney who handles bankruptcies.  Please keep in mind that your attorney can ONLY advise you properly if he or she has ALL the facts of your specific case.

Before seeing an attorney you should:

1.         make a list, to take with you to the attorney’s office, of:

a.         the name, address, account number, the amount owed, for each person or business that you owe money, and why the debt was incurred (are they medical bills, did you get a cash advance on a credit card, did you purchase a major item such as a refrigerator or car)

b.         the larger things you own.  You should include the make, model, year, vehicle identification number (found on the dash of the driver’s side) optional equipment and approximate mileage of any vehicles.  If you have documents from the purchase of a home, bring them.

2.         Get together and take with you when you go to see the attorney, originals or copies of:

 a.         Any papers from any other loan, like a note, and the papers that say the creditor has a lien on your property.

b.         Any financial statements for a creditor stating what you own, what you owe, and what you earn.

c.         Copies of your income tax returns for last year and the year before that.

d.         Copies of pay stubs or some record that shows what you have earned this year

An attorney can help you plan for  the bankruptcy, decide when to file a bankruptcy petition, or even avoid filing for bankruptcy. A few specific items are worth mentioning.

1.         If you intend to file bankruptcy you should stop using your credit cards. If  you borrow money with the specific intent of discharging the debt in  bankruptcy instead of paying it back, the debt is not dischargeable. In addition, three specific circumstances are worth mentioning:

(a)        certain luxury  purchases over $1000 within 60 days of the bankruptcy filing are presumed  nondischargeable; 

(b)        cash advances aggregating $1000 within 60 days of the  bankruptcy filing are presumed nondischargeable; and,

(c)        debts involving materially false financial statements are nondischargeable under certain  circumstances.

2.         Don't transfer your assets to friends, family and business associates to  protect the assets from your creditors. The transfer may be considered a  fraudulent conveyance. If it is, you may lose both the property and your right  to a bankruptcy discharge.

3.         Don't destroy any business or financial records. You can lose your right to  a bankruptcy discharge as a result.

4.         Carefully choose the creditors you pay. Some creditors, such as landlords,  secured creditors, and some utilities should be paid under most circumstances.  If you pay a credit card debt that eventually will be discharged, you may be  throwing money away. Your attorney should advise you on what debts should  and should not be paid while you prepare to file a bankruptcy petition. 

Rebuilding Your Credit
the Light at the End of the Tunnel

Most people with debt and credit problems think bankruptcy is a humiliating last resort, and something that will destroy their credit for years to come.  While that was true years ago, it does  not have to be the case today.  Individuals can now use bankruptcy as the first step in rebuilding their credit.

The bad news - where you really are now.

 Credit Reporting Agencies.  Credit reporting is governed by the Fair Credit Reporting Act.  That federal law limits the reporting of most adverse credit to a period of seven years from the time the debt is sent to collection or charged off. For people who are behind on their credit cards and other installment payments this can mean spending years to pay off the card debts or bring them current and then seven more years of poor credit ratings. For many people in this situation credit problems can easily be more than a decade.

For people who are able to pay only the minimum payment or less on their installment accounts, things are worse.  When credit card payments fall behind credit card companies can file suit. While some credit card suits result in compromises in which a less than full amount of the debt is paid (either in a lump sum or over time), many also result in judgments. Judgments cause additional problems

Judgments.  Judgments in Texas remain effective for ten years and can be renewed at the end of that time for another ten years.  Texas has a statute which allows the judgment holder to record the judgment so that it becomes a lien on real estate.  A judgment creditor can garnish bank accounts and execute on non exempt personal property.  While judgments do not always show up on credit reports, particularly after the initial ten year period, they will always show up on a search of the public records.  Remember that a name search in the public records is a normal part of the process in obtaining a mortgage loan.   Judgments also will impact on your ability to obtain other new financing, since the item you are financing may be at risk of seizure by the judgment creditor. Lenders usually require that you obtain a release of all Judgments before they will give you new financing.

 Bankruptcy and Future Credit - the Good News.

 While filing for bankruptcy protection is considered adverse credit and will be picked up by the major credit reporting services, it is unlike other adverse credit.  A bankruptcy filing can be reported for ten years after discharge.  There is an end to it.  While this can be damaging to your credit, most debtors have either already seriously damaged their credit (with no end in sight) or on the verge of such.  Remember that some debts, including recent tax liabilities, alimony, and child support may not be discharged (see discussion above).  Those will still have to be dealt with after the bankruptcy.

 Most lenders now view bankruptcy for what it is, a fresh start for the debtor.  Federal lending guidelines followed by many mortgage lenders and banks permit the lenders, in scoring the loan applicant, to ignore the bankruptcy filing and all previous debt and rely primarily on recent credit information once two years has passed after a bankruptcy discharge. If you qualify for a Chapter 7 filing you can file a bankruptcy petition, obtain a discharge of your debts in about three months, and, with self restraint, establish good credit about two years later.  In order for this process to work you must maintain some credit, such as a home loan and/or a car loan, to establish good credit after discharge.  After discharge you can apply for secured credit cards for the same purpose.  Most people have better credit ratings two years after discharge than they had when they decided to file bankruptcy. Bankruptcy can truly provide a “fresh start”.  

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