Spiritually Bankrupt

There is a blog that is run by Ron Satija here in Austin, TX. The basis for the site is dealing with the spiritual side of bankruptcy.

Curious?

Well check it out here

What does a “discharge” in bankruptcy mean?

One of the reasons people file bankruptcy is to get a “discharge” of their debt. A discharge is a court order which states that you do not have to pay the debts. Some debts cannot be discharged. For example, you cannot discharge debts for:

most taxes (however, income tax due under a tax return that has been on file for three years generally CAN be discharged);
child support or alimony;
student loans;
court fines and criminal restitution; and
personal injury caused by driving drunk or under the influence of drugs.

The discharge only applies to debts that arose before the date you filed. Anything that you incur after filing becomes your personal responsibility and is not discharged.

It is important to list all your property and debts in your bankruptcy schedules. If a debt is not listed, there is a possibility that it may not be considered for discharge.

You can only receive a chapter 7 discharge once every eight years.

Some creditors hold a secured claim (for example, the bank that holds the mortgage on your house or the loan company that has a lien on your car). You do not have to pay a secured claim if the debt is discharged, but if you wish to keep the property (the house or the car), you will need to keep making the payments.

My Student Loan Debt is unmanageable. Can I discharge it through bankruptcy?

Prior to October 7, 1998, student loan debt that had been in repayment for more than seven years from the date of bankruptcy filing was dischargeable. That seven year provision was eliminated with the bankruptcy law change in 1998. Student loans are now non-dischargeable under Title 11 U.S.C. Section 523 (a)(8) of the U.S. Bankruptcy Code unless a case of undue hardship exists.

It is very hard to qualify for the undue hardship provision. Most courts only grant a petition for undue hardship if the debtor is elderly, has high medical costs, and supports at least one dependent.

For those debtors who do not qualify for the undue hardship provision, there is one other option for discharging student loan debts. A new option for repaying student loan debt was established alongside the College Cost Reduction and Access Act of 2007. The Act created the Public Service Loan Forgiveness Program, in which public service workers can make student loan payments for ten years, at which point the remaining principle and interest will be fully discharged. Better yet, the amount of payment for ten years will be income-contingent or income-based. The program extends to a broad number of public service jobs including, government, military, police, fire, non-profit employees, public school teachers, and social workers, just to name a few.

Not all student loans qualify for this program. However, if the debtor's loans do not qualify, they may be able to consolidate into a qualifying loan.

Another issue with this program is that it may create forgiveness of indebtedness income which may be taxed by the IRS. It is still unclear whether or not the IRS will exempt this program from income tax by 2017, when the first loans under this program will be forgiven.

To find out more information about the Public Service Loan Forgiveness Program, you should visit http://www.finaid.org/loans/publicservice.phtml or http://loanconsolidation.ed.gov/ or contact the Department of Education at 1-800-557-7372.

How a Debt Collector Can Attempt To Collect A Debt In Texas

In Texas, there is no wage garnishment. That means that a creditor can not deduct any money from your paycheck. In fact, the mere threat of doing so is itself an illegal debt collection practice, and may create a potential lawsuit in favor of the debtor against the creditor.

Because wage garnishment is not an option, creditors in Texas are left with only a few options:

Call incessantly

This is their favorite tactic, and it is very effective. It is surprising how negatively this tactic influences people. It really drives people batty. The best way to deal with this, if you are a debtor, is simply to disconnect your phone line, and use only your cell phone (and change your cell phone number if necessary). If creditors call you at work, you may inform them that it is your work phone number and they may not call you at that number anymore. If they continue to contact you at your work number, you should send them a letter via certified mail, return receipt requested, advising them of your work phone number and asking them not to call you there. If they continue to call you at your work number, that is a debt collection violation, and you may be able to file a lawsuit against the debt collector.

Generally speaking, it is not productive to talk to debt collectors. They are adept at upsetting people. The insults and abusive language that my clients have heard from debt collectors is truly mind-boggling. If you want to get upset, just read the chapter on debt collectors in The Two Income Trap by Elizabeth Warren, or the similar chapter in Financial Peace by Dave Ramsey or watch the documentary film Maxed Out. The best approach with debt collectors is never to speak to them.

Send you letters

Debt collectors can send letters advising you of how much you owe and advising you to pay. This is generally not terribly upsetting to people and is not used very much by creditors because:

i.it is not very effective because it is not very upsetting to the debtors,

ii.all the communications are in writing and thus any illegal debt collection practice is easy to sue on and

iii.the cost of stamps add up

Calling family members or neighbors

Believe it or not, this tactic is arguably legal, so long as they do not disclose what they are calling about. Usually, they will say, “Do you know you neighbor Joe Smith? I have a message for him. Will you ask him to call me?” or “Would you be willing to provide a reference for your daughter Jill Smith? Would you have her call us at this number?” This technique is rarely used. I am not sure why it is not more heavily used. It is effective in upsetting people. My guess is that creditors are afraid of lawsuits for common law unreasonable debt collection, even though its technically not specifically prohibited under the Federal Debt Collection Practices Act or the Texas Debt Collection Practices Act.

Offset against your checking account (if you owe money on a credit card to the same bank that holds your checking account)

It may seem surprising but the issue of whether banks can offset went all the way to the US Supreme Court, and it is now very clear that banks may legally offset from your checking account (i.e. take your money) to repay themselves debts that you owe them. So, don't keep your money at a bank where you have a credit card or any other kind of debt.

Lawsuit

This technique is rarely undertaken because it is quite expensive. The filing fees, attorneys fees, process serving fees, and other expense can add up very quickly. And creditors know that in Texas, where there is no wage garnishment, they are unlikely to collect anyway. Many debtors become very freighted when they are sued for a debt. Generally speaking, this fear is unwarranted. All the creditor is asking the court to do is sign a piece of paper saying that the debtor owes money to the creditor. There is nothing new about the debtor owing the creditor money. There are plenty of monthly statements, demand letters, and other pieces of paper that say the debtor owes money. However, there is one thing special about a piece of paper signed by a judge. Papers signed by a judge called an “Order or Judgment,” can be used by the creditor to get the local Constable to seize any of debtors non-exempt property. So, if the debtor has a boat or an extra car or an extra piece of real estate other than his homestead, or anything that is non exempt, the creditor may be able to get the constable to seize it, auction it, and give the proceeds to the creditor.

The most common type of Non-exempt property seized by creditors is financial accounts (i.e. checking accounts, savings accounts, brokerage accounts, or any other account at a financial institution). Thus, once a Judgment or Order has been signed against a debtor, most debtors choose to live on a cash basis (i.e. not to have a checking account, savings account, brokerage accounts, or account at a financial institution) for fear that they will wake up one day to find their money has been taken from their account.

Other Important Things to Know About Lawsuits on Debt

Once a Judgment or Order has been signed it is good for ten years, and the creditor may renew it for additional ten year periods.

The creditor can obtain an Abstract from the Clerk of the Court that signed the Order or Judgment (an Abstract is just a one or two page summary of the basic terms of the Order or Judgment) and file that Abstract in the county public records to create a lien against any extra (i.e. non-homestead) real estate that the debtor owns in that county.

But there is no need for despair, even after a Judgment or Order has been signed, it can still be discharged in bankruptcy.

The statute of limitations of lawsuits regarding debt is four years. That means a creditor only has four years to sue you from the time that you stop making your payments. If a creditor sues you after four years have already elapsed, you can file a response in the lawsuit alleging that the statute of limitations has run because four years have elapsed and you can get the case dismissed. Note that creditors are always free to call you and ask you to pay even after four years. And if you agree to do so, they can keep pursuing you and can keep the money.

Debtors who have been sued for debts often ask whether they should file an Answer or Response of any sort in the lawsuit. If you have a legitimate dispute about the debt, or the amount of the debt, or the calculation of the debt, then it is fine to file an Answer in Response. However, generally speaking, this only delays the inevitable. In most cases the debt is valid, and the creditor will eventually be able to get a judge to sign an Order or Judgment saying so.

You must respond to any formal discovery (such as Interrogatories, Requests for Discovery, Requests for Admissions, Requests For Disclosures, etc.) sent to you by the creditor after you have been sued, and this obligation continues even after you have had an Order or Judgment entered against you. You can be held in contempt by the Judge and even arrested for failing to answer discovery requests. But you can never be jailed in the United States just for failing to pay a credit card or other debt.

Qualifying for a Chapter 7 in Texas

When we evaluate a Texas bankruptcy case to determine whether it qualifies for a Chapter 7, we first look at three major questions:

1. How much unsecured debt (credit card, medical, signature loans, personal lines of credit, etc.) does the debtor have?
It costs over $2,000 to file bankruptcy when you include all of the attorneys fees, filing fees, required classes, credit reports, etc. So, unless a debtor can discharge $10,000 or more, we generally don't recommend filing bankruptcy.

2. Does the debtor have any non exempt property?
Exempt property is property that is exempt from levy by creditors. In other words, exempt property is property that can not be touched by creditors. Non- exempt property is anything you own that is NOT exempt. Thus, “non-exempt property” is the property that creditors CAN TAKE. If a debtor has a large amount of non exempt property, which will be taken if he files bankruptcy, then it is usually not advisable to file bankruptcy.

The determination of what is exempt and not exempt is complex. There is a list of exemptions in the Texas Property Code. And there is another list of exemptions in the Federal Bankruptcy Code. Outside of a bankruptcy context, in the ordinary course of life, Texans can only exempt the types of property listed in the Texas Property Code exemption list. However, a Texas resident who files bankruptcy gets to choose the Texas list or the Federal list. Generally speaking, the Texas list is more generous, but it contains no exemption for cash and no “wild card exemption” that can be applied to anything. The federal list is generally less generous than the Texas list, but contains approximately $10,000 per person of “wild card exemption” which can be applied to any kind of property.

3. What is your income level?
In order to file bankruptcy, a debtor must pass the Means Test. Generally speaking, your income can be at most 5-10% or so above the median income for your county and your household size. To give you an idea of what that means, the current Travis County median income for a household size of 1 is about $38,545, for a household size of 2 it is $54,908, for 3 it is $57,053, and for 4 it is $66,400. Keep in mind that if you are married and you and your spouse both work, then both of your incomes must be counted against this household median income level. As with everything to do with bankruptcy, the calculation of the Means Test is complex (certain deductions apply, and certain kinds of income such as Social Security are not counted). It is absolutely essential that you consult with an attorney before making any decisions.

The determination of whether someone qualifies for a Chapter 7 is a complex one and the above three factors are only the first level of analysis that we do.

Why Chapter 13's rarely make sense in Texas

In many states, Chapter 13 Bankruptcy is more common than Chapter 7 Bankruptcy. However, in my bankruptcy practice in Texas, I rarely recommend Chapter 13. In this blog post, I will attempt to explain why.

It is almost always preferable to file a Chapter 7, if you qualify (see my other post on Qualifying for a Chapter 7), because in a Chapter 7 your debts are discharged within a few months. By contrast, in a Chapter 13, you must make monthly payments for five years to the Chapter 13 trustee(and the trustee distributes those payments pro-rata to your creditors) and only after 5 years do you get a discharge on whatever amount of debt is still owing at that time.

In Texas, there is no wage garnishment (i.e. no deductions from your paycheck by creditors) and the list of exemptions (i.e. the list of stuff that is exempt from levy by creditors- and thus may be kept by you) is very generous. So, the option of not filing any form of bankruptcy and doing nothing to respond to creditors attempts to collect from you is not such a bad option. This “do nothing option” is sometimes referred to as “informal bankruptcy.”

There are only two situations in which I commonly recommend that a debtor file a Chapter 13 bankruptcy:

1. Where the debtor is behind on his house and wants to force the mortgage lender to allow him to catch up on his late payments over time

2. The situation in which the debtor makes too much money to qualify for a Chapter 7 but is not comfortable with the informal bankruptcy option, usually because he or she is a person of delicate temperament and is very bothered by the telephone calls from creditors. (NOTE: see my other post on How Creditors Can Attempt To Collect In Texas.)