Bankruptcy
by: Texas RioGrande Legal Aid - Austin
Q.) Do I really need to file bankruptcy? What should I do about my debts?
A.) First, you should determine which of your debts are secured debts and which are unsecured debts. A secured debt is tied to a specific piece of property. If you do not make the payments, you lose the security, or property. For example, your car payment is a secured debt. If you don't make the payments, you lose your car. The car is the security, or the property tied to the debt. Another example of secured debt is your mortgage payment. If you don't make your mortgage payments, you lose your home. You need to be sure to pay the secured debt if you need the security.
Some store credit cards, like Best Buy and Sears cards, are secured debt. You should look at your credit card agreement to see whether it says the credit card company can take back or repossess something if you do not make payments (look for words like "security interest" and "remedies"). However, unless you have bought major appliances with these credit cards (such as a refrigerator or air conditioner), it is very rare for the store to try to repossess your purchases, especially clothes, since the cost of repossession is greater than the amount they could get by reselling your property. But, the creditors will certainly report you to the credit bureaus and hurt your credit rating. You should stop using these credit cards if you cannot pay them.
Unsecured debt is all debt that is not tied to a security. Most Visa and Mastercard accounts are unsecured. With unsecured debt, your creditors cannot take anything from you if you do not pay them. If you cannot pay unsecured debt, don't pay it. Many creditors do not follow through with their threats. Even so, the creditors will report you to the credit bureaus and hurt your credit rating. Again, you should stop using these credit cards if you cannot pay them.
Q.) What if my creditors sue me?
A.) These creditors may also sue you. If they do sue you, you can easily represent yourself and explain to the judge why you cannot or should not pay. The credit card company may get a judgment against you, which is an order by the court to pay. But a judgment does not force you to pay the debt, and the companies cannot take your home, your household goods, your automobile or put you in jail or send your children to foster care. You should not sacrifice your basic needs (food, housing, utilities, medicines, transportation, etc.) attempting to pay the judgment.
Q.) Are there different types of bankruptcy?
A.) There are basically two types of consumer bankruptcy: a "Chapter 13" bankruptcy and a "Chapter 7" bankruptcy. In a Chapter 7 bankruptcy, also called a liquidation, all of your unsecured debt is written off (you do not have to pay it) unless you have non-exempt property (such as a boat) that can be sold to pay it. You will not be forced to sell your car or your home to pay debts in a Chapter 7 bankruptcy, unless they are securities for a debt. Secured creditors (like the mortgage company or a car dealer) have the right to take, or repossess, the security (like the house or the car) and sell it to apply the money toward the secured debt unless you are able and willing to pay the secured creditor what is owed and continue the contract (and the creditor agrees to continue it or the bankruptcy court orders the creditor to continue it). If the proceeds of the sale of the security do not pay all of what is owed, the remaining balance is written off and you don't owe anything else on that debt.
In a Chapter 13 bankruptcy, you begin a repayment plan to repay as much of your debt as possible in no more than 5 years. As long as the unsecured creditors get more of what is owed to them than they would under a Chapter 7 bankruptcy, the bankruptcy judge will approve this type of bankruptcy plan. To do a Chapter 13 bankruptcy, however, you must have a steady income so you can make the monthly payments to the bankruptcy court. You must show the court that you can meet all your living expenses, like your mortgage or rent payment, along with your monthly bills, and still have enough money leftover at the end of the month to pay the bankruptcy court plus the back payments owed to your secured creditors. Many people on fixed incomes cannot do this.
Q.) I have a lot of credit card debt, but my house payment is current. Should I file for Chapter 13 bankruptcy?
A.) Since most of your debt is unsecured and you have not received a notice of default from the mortgage company, a Chapter 13 bankruptcy may not be your best choice at this time. You should remember that a bankruptcy stays on your credit report for 10 years and an overdue account stays on your record for about 7 ½ years.
Q.) How do I find a bankruptcy lawyer?
A.) If you believe a bankruptcy would help you at this time or, in any case, if you receive a notice of default from your mortgage company, you should call a private attorney who only works with bankruptcies to see whether a bankruptcy would help you. To find an attorney to do a bankruptcy in your area, we suggest you call the Texas State Bar Lawyer Referral Service at 1-877-983-9227. You should request the names of attorneys who practice bankruptcy in your county.
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