Christopher Todd Morrison, P.C.
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Houston Bankruptcy Blog

The consequences of filing for bankruptcy

Debtors in Texas and throughout the nation could use bankruptcy as a way to obtain financial relief. However, it should generally be used as a final option when there are no other ways to repay balances owed to creditors. It is important to note that bankruptcy does not eliminate every type of debt that a person could have. For instance, it generally won't take care of taxes owed or back child support payments.

Chapter 7 and Chapter 13 bankruptcy are the two most common types an individual can file for. A Chapter 7 case makes it easier to get rid of eligible debts faster while Chapter 13 cases involve a debtor making payments over a course of several years. Filing for bankruptcy can have an adverse impact on a person's credit score regardless of what type of protection a person seeks.

Filing a Chapter 7 bankruptcy in Texas

Texas residents who wish to escape overwhelming debt may be unfamiliar with the differences between a Chapter 7 and a Chapter 13 bankruptcy. Those who file Chapter 13 bankruptcies make payments for three or five years to pay down all or part of their debts, but debtors who file successful Chapter 7 petitions make no further restitution and see some or all of their debts discharged. This can make Chapter 7 bankruptcies seem far more attractive, but qualifying for a Chapter 7 petition can be difficult.

This is because the eligibility requirements for filing a Chapter 7 petition were changed when the bankruptcy laws were modified extensively in 2005. This kind of debt relief is now reserved for individuals who can pass a means test that takes their income and expenses into account to determine whether or not they are able to make monthly payments to pay down their debt. For this reason, Chapter 7 bankruptcies are generally filed by debtors who are unemployed, destitute or struggling to make ends meet on extremely limited incomes.

If foreclosure looms, do not fall for help from scammers

Your home really is your castle, your pride and joy, but you have missed some payments, and the lender is threatening to foreclose.

You are very concerned and vulnerable to scammers who claim they can help you keep your home or sell it quickly, but always for a fee. There are many schemes, but here are three of the most common, as well as a valid option you may want to consider.

Utilization, revolving credit and credit card debt

According to an infographic from Supermoney that draws on a report from the credit agency Experian, the average credit card debt of people in Texas falls somewhere in the middle of the national average. People in Iowa carry the lowest balances with an average of $5,155. Alaskans have the highest at $8,515. In Texas, the average is $6,902.

When it comes to credit card balances, there are two elements to keep in mind when assessing financial health. One is revolving credit and the other is utilization. A high monthly credit card bill does not necessarily mean a person is struggling with debt because many people use their credit cards in order to get reward points and then pay them off monthly. When people do keep balances on their credit cards, they are known as revolvers, and the interest charges on these balances can add up. Nationwide, this revolving debt is more than $1 trillion, and the interest charges for the average household costs about $1,000 monthly.

3 approaches to eliminating credit card debt

Unemployment, medical emergencies or unexpected vehicle repairs can send people in Texas reaching for their credit cards. Although numerous reasons can cause someone to fall into debt, the balances need to be paid at some point. Debtors have several approaches to choose from when confronting credit card balances and high interest rates.

Initially, people need to halt credit card use, list their debts and interest rates and create a payment plan. With the avalanche method, people scrape together as much extra money as possible and use it to pay the balance with the highest interest. After paying that debt, the payment plan will target the next most expensive debt. Alternatively, the snowball method involves people paying off their smallest loans first and working their way up until all debts are resolved.

How bankruptcy can help with debt relief

Texas residents who are unsure about how they will pay down their debt balances may start thinking about filing for bankruptcy. In fiscal year 2018, there will an estimated 733,000 companies and individuals doing so, which is up from 685,000 in 2017. According to the Federal Reserve, Americans had a total of more than $1 trillion in credit card debt at the close of 2017. They also carried a $1.2 trillion in auto loan debt and $1.4 trillion in student loan debt.

While there are many options that people could use to stave off bankruptcy, it may not be in their long-term interest to do so. For example, using money from a 401(k) account to repay a credit card or other type of debt is usually not a good idea. This is because such accounts can be off-limits to creditors in a bankruptcy case. Penalties can apply to those who are younger than 59 1/2.

3 illegal types of creditor harassment

A debt of even a couple thousand dollars can be enough for debt collectors to hound you. To prevent these calls from becoming abusive, lawmakers enacted the Fair Debt Collections Practices Act, which covers all household, family and personal debts.

While debt collectors can certainly call you from time to time, there are actions they cannot take. It is important to remain aware of your rights.

Bankruptcy, through its automatic stay, can put a halt to debt collector harassment. However, even if you have not filed for bankruptcy, a debt collector is unable, by law, to do the following:

Tax debt may remain after a bankruptcy

When a Texas resident files for bankruptcy, tax debts could be discharged along with any other outstanding balances. However, it is not a given that a tax debt will be eliminated. If that debt is related to withholding taxes owed, it generally won't go away in either a Chapter 7 or Chapter 13 case. The same is true if a person is trying to use the bankruptcy system in an effort to evade a tax bill.

Tax liabilities associated with fraudulent or frivolous tax returns will also not be eligible for discharge in bankruptcy. To qualify for a potential discharge, the taxes owed must be assessed 240 or more days prior to a person filing for protection. The debt must also be at least three years old at the time of a bankruptcy filing and associated with a return that was filed two or more years prior to the filing.

Seeking assistance paying off medical debt

Texas patients who can't afford to pay their medical bills may be able to find help doing so. Across the United States, hospitals offered $38 billion in what is referred to as charity care. Sutter Health offers families of four without insurance who make up to $100,400 the ability to have their bills waived entirely. Those who have insurance can still ask to have their payment obligations waived.

If a government gives financial assistance to a hospital, it could be required to offer this type of assistance. In fact, most hospitals will offer it, but they may not be forthcoming about doing so. Patients are advised to ask for help as soon as possible as the odds of receiving assistance can go down after a bill is sent to collections. If a debt has been paid, it is important for individuals to keep proof of that fact.

What to know about debt in America

The typical Texas resident has some level of debt. According to Experian, the average American household debt excluding mortgages was $24,706 in 2017. The average credit card debt last year totaled $6,354, which was a 2.7 increase throughout 2017. Those in the Generation X and Millennial age groups saw their credit card burden go up the most. Retail credit card debt grew 4 percent for an average balance of $1,841.

Overall, Americans owed $1.02 trillion in combined debt as of June 2017. In the third quarter of 2017, 7.5 percent of all credit card debt was delinquent by 90 days or more. While this may show that Americans are having trouble keeping up with their debt, there are ways they can get a better handle on it. First, it is a good idea to prioritize which debts to pay off as soon as possible.