Now that the bankruptcy laws have changed, can I still file for bankruptcy?

YES. A study was done by the U.S. Department of Justice to compare the effect of the new law which found that 83% of the people who filed Chapter 7 under the old law would still be able to file Chapter 7 under the new law. The main difference for most people filing a bankruptcy now is that it requires them to complete additional paperwork, a brief credit counseling session, and a personal finance management course (both the credit counseling and management course are done at home). A small percentage of people seeking to file Chapter 7 may not qualify because their income is higher than the median family income for a family of their size in Texas.

What is the difference between secured and unsecured debt?

Examples of secured debt: house loan, car loan, property taxes, or business loans that you pledged assets for. Also credit accounts for: furniture stores, jewelry stores, and electronics/appliance stores.

A secured debt is "secured" by something you bought - for example, you bought a car and if you don't make your monthly car payment, the lender can take back the car which is the "security" for the loan. The right to repossess merchandise for nonpayment is stated in your loan agreement. Once a lender has taken their property and resold it, you may still owe them the difference between what they got at the sale and what you still owed them on the loan. This portion of the loan is unsecured.

Unsecured debts are not "secured." The lender can't take any of your assets from you if you stop making payments, they would first have to sue you and get a judgment against you in order to collect on their debt.

Examples of unsecured debt: most credit cards, medical or utility bills, loans that required only a signature. Some unsecured debts, like recent income taxes, most student loans, or domestic support obligations can't be discharged in a bankruptcy case.

What is the difference between Chapter 7 and Chapter 13?

Chapter 7 - Timeframe: approximately 4 months

Chapter 7 is a liquidation bankruptcy. In this type of bankruptcy, you don't have to repay your unsecured debts; they are discharged (A discharge is a Court order stating that you do not have to repay). Some debts can't be discharged in a bankruptcy and must be paid. Most unsecured debts are usually discharged. You may be eligible for this type of bankruptcy if you are able to pay your monthly living expenses and any secured debt payments but don't have any money left over to make payments on unsecured debts. A trustee is appointed by the Bankruptcy Court to review your case. One of the trustee's jobs is to see if you have any assets that are not protected by bankruptcy law. Almost everyone who files Chapter 7 in Texas gets to keep all of their assets. Your attorney can tell you before you file your case if any of your assets are at risk. If you do have an asset that is not protected, the Trustee can sell it and use the money to repay a portion of your unsecured debt. You have to be current on your secured payments (house note, car note, etc.) or the lender can take back their property.

Chapter 13 - Timeframe: 36 to 60 months

A Chapter 13 lasts much longer than a Chapter 7 because you are making a partial repayment of your debt. Most of the people who file Chapter 13 have gotten behind on a secured loan like a house or car, and they are in danger of losing the property. Filing a Chapter 13 can stop a lender from foreclosing on a house or repossessing a car.

In a Chapter 13 you must have enough income to resume your regular monthly payments AND make an additional payment (your "plan payment") to the Chapter 13 trustee to catch up the amount that is behind on your house and/or cars. In addition, a small part of your plan payment goes toward your unsecured debt. This plan payment comes from your "disposable" income, that is the extra monthly income you have after your necessary expenses are paid.

Some Chapter 13 cases are filed to pay tax claims to the IRS. In a Chapter 13, all penalty and interest stops on the date of filing (if the IRS has filed tax liens, they can receive interest but not penalty).

Sometimes people file a Chapter 13 because their monthly income is too high to qualify for a Chapter 7, but they may still be able to discharge a significant part of their unsecured debt.

Chapter 13 cases can only be filed by individuals and married couples. Corporations and partnerships are not eligible for Chapter 13 and must file a Chapter 11 to reorganize.

What is the process to file a bankruptcy?

Bankruptcy is mainly paperwork. Typically, you come in to meet with an attorney to discuss the process and the basic information we will need from you to handle your case. We will give you a packet of paperwork to take home and fill out, and a list of documents we will need to review. You return for a second meeting to discuss the completed packet with the attorney. The attorney then enters your information into the computer and you return for a third meeting with the attorney to sign the completed paperwork. You will also need to complete a credit counseling session before your case can be filed with the court. Your paperwork will include schedules of assets and liabilities, a monthly budget, and some historical information about income, payments to creditors, and transfers of property.

Once the case is filed, you must attend a meeting with your trustee. Your creditors receive notice of this meeting, but rarely attend. Your attorney attends this meeting with you. The bankruptcy trustee reviews your paperwork to determine if you have any assets that are not protected and could be used to partially repay your creditors. The Trustee also looks at your income and expenses to see if you have extra income that could be used to repay creditors. In a Chapter 13, the trustee looks at the same issues, but the main focus is on whether you are paying all of your disposable income to the trustee through your plan payment. In either case, your meeting with the Trustee usually lasts ten minutes.

After the meeting, there are deadlines for creditors to act in your case. For instance, if a creditor wants to object to your list of protected (exempt) property, they must do so within 30 days of completion of your creditors meeting. If a creditor wants to object to your discharge claiming you committed fraud, they must do so within 60 days of the first date set for your creditors meeting. After these deadlines have passed, the court will enter the discharge order which is mailed to you and all of the creditors listed in your bankruptcy case, and your case is closed.

In a Chapter 13 case, the process is similar, except that you will be making your monthly plan payments for 36 to 60 months. The length of the plan depends upon your circumstances and how long you need to catch up on your debts. Once you complete payments under your plan, the court will enter a discharge order. A Chapter 13 plan cannot last longer than 60 months.

What debts will I still owe after the bankruptcy?

Some debts are not discharged. Child support, alimony, student loans and taxes are the most common debts which are not discharged. Child support and alimony are never discharged. Student loans will not be discharged unless the debtor files a lawsuit against the lender and convinces the bankruptcy judge that requiring them to repay the debt will constitute an UNDUE hardship. Student loan hardship discharges are rarely granted.

Income taxes are not dischargeable unless a three part test is met. The tax return must have been due at least three years before the bankruptcy was filed, the return must have been filed at least two years before filing for bankruptcy, and the taxes must have been assessed for at least 240 days. Trust fund taxes (taxes withheld by an employer from employee wages and sales taxes) are not dischargeable.

Debts incurred through fraud are not dischargeable, but the creditor must file a lawsuit in your bankruptcy case within a specified time period, or the debt is discharged. If you have any concerns about this issue, it is very important that you disclose the circumstances fully to your attorney.

How will bankruptcy affect my credit?

Credit reporting companies can report a bankruptcy on your credit report for 10 years. This does NOT mean that you will not be able to obtain credit for 10 years. We frequently hear from clients who got credit card applications within a few months after their bankruptcy discharge and the application says, "we were sorry to hear about your recent bankruptcy." Creditors are willing to extend credit because they know you cannot file another Chapter 7 case for 8 years.

Many car and home lenders will not lend to you or will require a higher rate of interest within the first year of the bankruptcy discharge. We know mortgage brokers who have been able to get clients a market rate mortgage one year after the bankruptcy as long as you pay your debts on time after the bankruptcy.

Is there any alternative to filing bankruptcy?

There is always an option not to file bankruptcy, but bankruptcy may provide protections which are not otherwise available. For instance, if a mortgage company is threatening to foreclose on your home, a Chapter 13 bankruptcy allows you more time to get caught up. If the problem you are dealing with is credit card debt or other unsecured debt, there is really little the creditor(s) can do to collect the debt from you. Even if they sue you, they will get a judgment which is simply a piece of paper that says you owe the money. Even if they get a judgment, they still can't garnish wages in Texas (except for child support, taxes, or student loans). If they file a copy of the judgment in the real property records where you own a home, it may make it difficult (but not impossible) to sell or refinance your house. The main downside of ignoring creditors is that they will harass you at home and work. Most people who file bankruptcy do so not because a creditor is doing something to them in court, they just want peace of mind.

There are services that will try to help you consolidate your debts and reduce your monthly payments. Be VERY careful if you try dealing with one of these companies. Most will take your money and accomplish very little, if anything. I see clients at least once a week who tell me that they were promised payments in one amount, paid the payments for several months, and then the service told them that their payments would have to increase significantly and continue for a longer period of time. The only one of these companies I would ever recommend is Consumer Credit Counseling Service. They will tell you at the beginning whether or not they can help you. (I see clients all of the time who tell me that they went to CCCS and they told them they needed to file bankruptcy.)

One thing you should be aware of is that if you are doing a debt consolidation, most of your creditors will report you as being delinquent and/or in collection during the repayment plan. Until you actually complete the repayment plan, you are not helping your credit.

How much does it cost to file bankruptcy?

The fees charged are based upon the complexity of the case. The more complex the case, the higher the fee. All fees charged in a bankruptcy case must be disclosed to the court and are subject to review.

Our fees are not the lowest, but you get what you pay for. Michael Baumer is one of just 45 attorneys in Texas who are board certified in both consumer and business bankruptcy and has served five terms as president of the Austin Bankruptcy Bar Association. Additionally, Michael speaks at numerous seminars each year, educating other attorneys about the correct practice of bankruptcy law. (Click here for a list of Michael's Articles and Presentations)

Be careful about the fee agreement you have with your attorney. By law, the fee agreement for a consumer bankruptcy case must be in writing and should set out what is included and what is not included. Some attorneys offer a lower fee, but charge additional fees for basic work. The result may be that an attorney who advertises a lower fee may actually end up charging more by adding fees as your case progresses. When you come in for your free initial consultation, we will provide you with a copy of our fee agreement that itemizes all fees so that there are no surprises as to what you are being charged.

Our fee for a basic consumer Chapter 7 case is $2500, which includes the filing fee of $335 and the credit counseling and education course fee of $40. If your case involves issues relating to your income, taxes or non-exempt assets, you may be charged a higher fee. You can retain us by paying $350 and we will begin accepting calls from your creditors, but it will be necessary to pay a total of $1,500 (which includes the filing fee and credit counseling and education course fee) to file your case. We permit clients to pay the balance of their fee in payments of $200 per month, beginning the month after your case is filed.

A business related case is typically more complicated and the fee will be higher depending upon the facts of the case. Also, the amount paid prior to filing and the monthly payments after filing will be higher too.

The fee for a basic consumer Chapter 13 case has been set by the court and is currently $3600-$3900, plus the filing fee which is $310 and the credit counseling and education course fee of $40. You can retain us by paying $350 and we will begin accepting calls from your creditors, but it will be necessary to pay a total of $1400 (which includes the filing fee and credit counseling and education course fee) to file your case. The balance of your Chapter 13 fees are paid through your Chapter 13 plan. If your case is more complicated than the basic consumer case (there are business issues or complicated tax problems or disputed liens), the fee will be higher, but is still subject to court approval.

Bankruptcy is a serious and complicated legal process. When you hire our firm, you are getting our wealth of experience and knowledge regarding bankruptcy to get your case filed correctly from the very beginning.

Do I Have a Home Equity Loan Violation?

In our practice, we have discovered that a number of our clients have home equity loans that were incorrectly prepared. In a number of cases, the appraisal on which the loan was based was exaggerated in order to make the loan. In some cases, the lender charged more for closing costs than they are legally permitted to charge. What does this mean? In Texas, there are legal penalties for defects in home equity documents and certain violations of the law can void the loan. That’s right: if they faked the appraisal, or charged too much for closing costs, you may not have to repay the loan. Michael Baumer has successfully litigated or settled a number of claims against home equity lenders.

How do you know if your loan is a home equity loan?

A home equity loan is any loan secured by your home for which you received cash back at closing or the lender paid other debts (like your credit cards)—even if your lender described the loan as a “refinance”—if you got money back, it’s a home equity loan.

If you believe you have a home equity loan, please bring your entire loan file with you to your consultation. If you have more than one home equity loan, bring the prior loan paperwork as well. We can review your paperwork and advise you on your options if your home equity loan contains violations.

Understanding Foreclosure in Texas

It is not unusual for us to have potential clients call our office in a panic because their mortgage company is about to foreclose on their homes. We ask them for the foreclosure sale date and they don’t know what we mean, so we ask them to look at the Notice of Trustee’s Sale and they say they don’t have that document. We ask how they know the lender is going to foreclose and they say “they told me on the phone.” This kind of confusion is fairly common and typically is more the result of poor communication than anything else.

The requirements for foreclosure of real property in Texas depend on the type of mortgage that is being foreclosed upon. There are several types of mortgages, but there are three that are by far the most common:

  • (1) a purchase money mortgage;
  • (2) a purchase money second mortgage and;
  • (3) a home equity loan or home equity line of credit.

A purchase money loan is what it sounds like – a loan to purchase the home. In a “conventional loan,” the borrower/buyer of the home typically makes a down payment of at least 10% of the purchase price. The mortgage loan is in the amount of the balance of the purchase price.

Many borrowers are unable to make a down payment of 10% or 20% so they have to resort to alternative sources of financing. These may include government guaranteed loans where the borrower/buyer makes a minimal or no down payment but the government guarantees the loan so the mortgage lender is assured of payment. These may also include “80/20” loans or “80/15/5” loans. In these cases, the borrower/buyer makes a down payment of 5% or less of the purchase price and executes a first lien of 80% and a second lien of 15% or 20%.

Homeowners may also borrow against the equity in their homes by taking out a home equity loan or home equity line of credit. There are many restrictions on equity lending in Texas, but most of those technicalities are beyond the scope of this summary.

Texas residents can also obtain a home improvement loan to make repairs or improvements to the home. Unlike a home equity loan, which can be used for virtually anything, a home improvement may only be used to make improvements to the home and there are many restrictions which can effect the validity of the loan. As a result, home equity loans are far more common than home improvement loans and in many cases, lenders prefer to make an equity loan, even though the proceeds will be used only to make improvements to the property.

If a lender is foreclosing on a purchase money lien (whether it is a first lien or second lien), there is a two step process that the lender must comply with.

  • First, the lender must send a notice letter to the borrower(s) that notifies them that the loan is in default and that if the borrower does not cure the default, the lender intends to accelerate the balance of the loan and foreclose on the property.

    “Accelerate” means that the lender is calling the promissory note due. After acceleration, instead of owing monthly payments for many years, the borrower now owes the entire principal balance plus any accrued interest and collection costs.

    How much notice the lender is required to give is controlled by the loan documents. Approximately 90% of residential mortgages in the U.S. are on FNMA (“Fannie Mae”) forms which require 30 days notice, so we commonly call this notice a “30 day notice.” If the loan documents are not standard forms, the notice requirements may be different.

  • After the lender sends the 30 day notice, the lender must then send the actual foreclosure notice. In Texas, that notice is called a “Notice of Trustee’s Sale.” The lender must give at least 21 days notice of the sale. In Texas, notice starts on the date of mailing of the notice, not the date of receipt. In Texas, foreclosure sales must be conducted on the first Tuesday of the month, so timing can be an issue. For instance, if the lender sends the 30 day letter on March 20, the 30 days to cure the default ends on April 19. There is not enough time to give 21 days notice to foreclose in May, so the lender would have to wait until at least the first Tuesday in June to foreclose.
  • Most major mortgage lenders do not start the actual foreclosure process until the loan is at least 90 days delinquent. After the borrower reaches 90 days delinquent, the lender sends the 30 day letter and the actual legal process starts. The result is that most foreclosures in Texas take at least five months from default to the actual foreclosure. This is not a legal issue, this is more in the nature of practical reality.

If the mortgage is a home equity loan or home equity line of credit, there is an additional step to foreclose the loan. After the lender sends the 30 day letter, the lender must file an application in the state district court in the county where the property is located asking for an order allowing the foreclosure. The application must be served on the borrower and the borrower has 38 days from mailing of the application to file a response. If the borrower files a response to the application, the court has to set a hearing on the application. The Texas Rules of Civil Procedure provide that the application must be set for hearing on an expedited basis. The reality is that the hearing is set for expedited hearing only if the lender requests a hearing. We routinely see cases where the lender files the application, we file a response for the borrower, and the lender waits weeks or months to set the application for hearing. Once the application is granted, the lender still has to send the actual foreclosure notice, so the process takes at an absolute minimum of 89 days (30 days, plus 38 days, plus 21 days). The practical reality is that the process may take several more months.

Notwithstanding what you might have seen or heard on the news or the blogosphere, most lenders really don’t want to foreclose on your property. The economic reality is that lenders typically recover less (and sometimes substantially less) than the real market value if they have to go through the foreclosure process. As a result, many lenders will go through a protracted process to attempt to approve a mortgage modification, which will require the borrower to submit (and possibly resubmit and resubmit) financial information (paystubs, bank statements, tax returns, asset and liability lists) in order to evaluate the borrowers qualification for a modification. At our office, we routinely see potential clients who are two or three years (not months) behind on their mortgage payments before the lender actually moves forward with the foreclosure process.

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