Bankruptcy is a federal legal process, not a state process. That means that the eligibility requirements, legal options and filing procedures are the same in every state, including Texas. In order to file for bankruptcy in Texas, it is best to get an overview of the federal laws, as well as relevant Texas state bankruptcy laws that determine what assets an individual can retain after declaring bankruptcy.
What Is Bankruptcy?
Bankruptcy is a legal process intended to offer a new start to those who cannot pay their accumulated debts. While there are many different types of bankruptcy in the codes, most individual Texans filing for bankruptcy either file under Chapter 7 or Chapter 13. Each of these types of bankruptcy has its own eligibility requirements, and the process for filing is very different.
Common Types of Bankruptcy
Chapter 7 and Chapter 13 bankruptcies have different purposes, so it is important to determine which one would work best in a given situation. That depends on the individual's financial situation and their assets.
Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, an individual essentially forfeits most of their assets, other than those that state law declares to be exempt; their remaining debts are excused. This type of bankruptcy is relatively quick to file – in Texas it might not take more than a few months to complete – and there are no extended payment plans to follow. On the other hand, the filer may lose valuable assets, including a residence and a vehicle if they are behind in payments and have substantial equity in them.
However, Texas law sets out a number of exemptions from bankruptcy, which may exclude a home under the homestead exemption, personal property and a certain amount of savings. State law also gives filers a generous personal vehicle exemption.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is one in which debts are restructured rather than being eliminated altogether. Those filing for Chapter 13 must establish a repayment plan for all creditors to pay part or all that they owe. On the other hand, those filing for Chapter 13 bankruptcy can prevent a foreclosure on their home or a repossession of their car. This process gives a debtor extra time to repay debts, whether the creditor wants to extend the debt or not.
Debt Relief in the Bankruptcy Process
Most individuals considering bankruptcy hope to wipe out their debts, and bankruptcy can eliminate many consumer debts, like credit card balances and medical bills. If a debt is secured by an asset, the asset is collateral for that secured debt and will be forfeited. That means, for example, that if an individual bought a home with a mortgage, the mortgage lender has the authority to take over the asset and sell it to cover missed payments. This is usually the case for car loans for financed vehicles as well.
It's also important to recognize that not all debts will be discharged in bankruptcy. Some debts are termed nondischargeable. These include spousal and child support arrears, recent tax bills and most student loan debt absent a prior lawsuit that was successful.
Filing for Texas Bankruptcy
Anyone considering filing for bankruptcy without a bankruptcy lawyer should be sure that they understand the legal process and consequences of their actions. Those who do file on their own, termed pro se litigants, do not get a break from the federal court in Texas or in any other state. In fact, court employees are not permitted to assist an individual filer.
It is possible to find people who are not attorneys, but who offer assistance filling out the bankruptcy court forms. Note that these petition preparers are forbidden from giving any type of legal advice or explanations, and, under Texas law, can only enter information onto forms.
Pro se litigants must follow the same rules and procedures that bankruptcy attorneys follow or face sanctions. This includes a familiarity with the U.S. Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and the local rules of the Texas court. On the other hand, the forms are available free at the court and can also be found online at the bankruptcy court website. The forms numbered in the 100 series are the appropriate ones to use for individuals and married couples filing for bankruptcy.
How to File for Bankruptcy
When an individual actually files for bankruptcy in Texas, they must first collect all relevant financial information, including complete income information with sources and amounts, and several years' of tax filings. All debt information is also necessary, both secured and unsecured debt, as well as a monthly budget and information about recent significant financial transactions. Gather a list of assets as well, including deeds to property owned and titles to vehicles.
From that information, the petitioner should complete the bankruptcy petition and fill out any other necessary court forms. In every case, the answers on the bankruptcy forms should be complete and honest. It is especially important to list all debts, creditors and assets.
Bankruptcy Stay in Texas
After an individual files for bankruptcy in Texas – Chapter 7 or Chapter 13 – almost all debt collection assets come to a halt. An automatic stay goes into effect that forbids credit providers from taking any action to collect the debts. It also halts any other litigation including foreclosure procedures against a home or repossession actions against a vehicle.
The court sends a notice to all of the creditors listed in the petition informing them of the stay, another reason for filing complete documents. A creditor who gets notice of the bankruptcy proceeding, but continues to harass the debtor can face fines and court penalties.
This automatic stay gives the debtor breathing room since it not only forces creditors to cease their collection activities immediately, it precludes any new actions in Texas state court against the individual for debts. On the other hand, this is not always the final say. Lenders can file a motion in bankruptcy court asking the judge to lift the stay. If the court agrees, the lender can go ahead with a separate action.
Other Effects of a Bankruptcy Discharge
While the idea of having debt erased and a fresh start is a pleasant one for most individuals, bankruptcy comes at a cost. That is, a bankruptcy negatively affects the person's credit report and tanks their credit score. This makes sense since getting debts discharged without paying them makes it less desirable for another creditor to lend that individual money.
And the bankruptcy stays on a credit report for quite a while. If a person files for Chapter 7 bankruptcy, the filing will remain on their credit report for 10 years. A Chapter 13 filing only stays on the credit report for seven years, since it involves a structured repayment plan rather than a liquidation or discharge of debt.
Teo Spengler earned a J.D. from U.C. Berkeley's Boalt Hall. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an M.A. and an M.F.A in creative writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.