January 18, 2018

Buying a house after bankruptcy

My wife and I were planning on buying our first house within the next couple of years, but now it looks like we’re going to have to file bankruptcy soon. Will that prevent us from ever being able to get a house?

Aaron T.
Austin, TX

Assuming that you’re in decent financial shape after filing bankruptcy you should be able to get a house fairly soon. Two years after a person files bankruptcy he or she is eligible for mortgage loans on the same terms as if they had not filed bankruptcy. And even before two years are up, the amount of your down payment and the stability of your income and your credit history after bankruptcy are generally more important than the fact you filed bankruptcy in the past.

Chapter 7 vs. Chapter 13 vs. Chapter 11 bankruptcy

7, 11, and 13 refer to different parts, called chapters, of the bankruptcy law. Individuals may use Chapter 7 or Chapter 13. Chapter 7 bankruptcy gives you a fresh start by discharging your unsecured debts (such as credit cards and medical bills). It is sometimes called liquidation. Businesses may used Chapter 7 bankruptcy to liquidate or Chapter 11 bankruptcy to reorganize their business and repay their debts over a period of years under a “plan.” Business that want to continue as going concerns must use Chapter 11 bankruptcy.

There is also a very rare beast called “Personal Chapter 11.” This is used where a person has too much debt (the limit is roughly $600,000), or where the person needs a payment plan of longer than 5 years. The maximum payment plan allowed under Chapter 13 is 5 years. Under Chapter 11, there is no limit, but you have to convince the Judge that a longer payment plan makes sense, is likely to be successfully completed by the debtor, doesn’t unduly harm the creditors, etc.

How a Debt Collector Can Attempt To Collect A Debt

In this article, I will discuss what creditors may do to collect debts in Texas.  Your state could be a bit different (ex. your state may allow wage garnishment – as discussed below), but this article will still give you an idea of what the process can be like.  You should consult with your local bankruptcy attorney regarding your situation.

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.


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.

Even after a Judgment or Order has been signed, it can still be discharged in bankruptcy.  (But, once an Abstract is filed, if a lien attaches to any non-exempt property, that lien may survive bankruptcy.)

In Texas, the statute of limitations on 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.

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.


[UPDATE:  New student loan forgiveness programs have been added since this article was written.  Do some internet searching on “student loan forgiveness” to find out what is available.]

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 taxes for which a return has been on file for a long time can, in some circumstances, 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.

I owe money to the IRS, can I discharge that when I file bankruptcy?

There answer to that question is that it depends.  There are two tests that have to be met.

1.  Has the return been on file long enough?

Were all of the related returns (i.e. all your tax returns for the tax years for which these taxes are owed) filed on a timely basis, and has it been 3 years since the last date such returns were due including all extensions? [Note: This means that for tax year 2006, the return with extension would be due Oct. 15th, 2007, and you’d have to wait three years from that date.  But if Oct 15th fell on a weekend, then the return would actually be due Oct 16th or 17th, and you’d have to wait three years from that date.  It’s very tricky. ]

2.  Has the amount owed to the IRS been settled/assessed for at least two years?

If your return was ever challenged or if the amount you owed to the IRS was ever unclear for any reason, then you must also wait at least two years from the time the amount owed to the IRS was finally assessed.


If the answer to both questions above is yes, then you can file bankruptcy and discharge the IRS debt. If the answer is no, you can either (a) wait until it has been a long enough period of time and then file bankruptcy, or (b) try an “Offer in Compromise” now and see what happens.

You can find info on Offers in Compromise on www.irs.gov. Or you can hire a tax dispute attorney, to help you try to negotiate a settlement with the IRS. If you decide to go this route, be sure you hire a reputable attorney or CPA and not one of the Fly-By-Night organizations that claim to be able to handle tax problems.

Something to keep in mind – If some of this tax debt is for monies withheld from employees’ paychecks that you failed to forward to the IRS, then the debt may not be dischargeable, and such debt may pierce through a corporation or LLC entity and attach personally to the business owner.

What is exempt property?

Exempt property is property that can not be taken from you by your creditors. In other words, it is property that is exempt from levy by creditors. Even hundreds of years ago in England, where our legal system was developed, debtors were able to keep the shirts on their backs. Today the law is more generous. The idea behind exemptions is that debtors get to keep the minimal property necessary to sustain themselves and their livelihoods. So, in most states, the list of exempt property includes things like clothing and personal effects, tools of the trade, one vehicle per driver (up to a limited dollar amount of value), your home (up to a limited dollar amount of value in most states), retirement accounts, and life insurance policies.

After hearing that list, most people say, “That covers everything I own. What kinds of things are not exempt?” Common examples of non-exempt property which CAN be taken by creditors include boats, RV’s additional real estate (i.e. real estate other than your homestead), stocks/bonds, ownership of a business, expensive jewelry and cash in a checking or savings account.

Each state has its own list of which types of property are on the list and what is on the list can vary greatly from state to state. And there are several exceptional types of debts, such as child support and taxes, that can allow creditors to reach even otherwise exempt property.

Also, if a debtor voluntarily places himself into bankruptcy, additional federal laws come into play which can vary what is exempt and what is not.

Pay Day Loan Lenders and Threats of Criminal Prosecution for Hot Checks

Pay day loan lenders are often the most aggressive about collecting.  I routinely hear about pay day loan lenders violating debt collection laws.  They commonly ask you to make out postdated checks for them when you borrow the money.  Then, when they deposit those checks later, if one bounces, they call and threaten to report you to the police for writing a hot check.  Sometimes, they even say “You could go to jail for writing that hot check.”  This is not true.  You can’t be convicted of a crime without having some level of intent (i.e. a state of mind involving some level of desire or wilful disregard towards commission of the crime).  Writing a post-dated check is not a crime.  And having less money in the future than you expected is also not a crime.

These threats by debt collectors are illegal.  It is illegal to threaten criminal prosecution to collect a debt, especially when no crime has been committed!  If you have a writing or recording of these threats, you should visit with an attorney about the possibility of filing a lawsuit against the debt collector for illegal debt collection practices under the Federal Debt Collection Practices Act (which applies in all states) or the Texas Debt Collection Practices Act (which applies only in Texas).

Everything I have stated above, and everything I write on this blog, assumes that the acts took place in Texas and Texas law applies. I can’t say for certain, but I would imagine that other states are more or less the same with regard to their hot check writing laws.  After all, it would violate common sense, basic human decency, and the United States Constitution to imprison someone who had no level of intent towards commission of a crime.  Check with your local bankruptcy lawyer.

Good summary of when you can file Chapter 7 Bankruptcy even if you fail the means test – the key is “special circumstances”

Read the whole article by Lori Patton here.  It’s a good overview of how bankruptcy lawyers think through the means test.

Here is a small excerpt:

After all necessary income and expenses are plugged in, my software gives me either a green smiley face or a yellow frowny face at the bottom indicating whether going through the long form got us under median. Green is good. Yellow is not good. When I still have yellow after going through long form I still need to ask a few questions before giving up and telling a client they are ineligible for filing a Chapter 7 Bankruptcy. This is because we still have a couple escape hatches in 11 USC 707(b) “special circumstances” and “totality of the circumstances”.

Examples of “Special Circumstances” are given in the Code: “such as a serious medical condition or a call or order to active duty in the Armed Forces…  I will tell you now that a child needing braces or getting ready to go to college is not going to fly. A car on its last leg and the need to replace it has worked for me in the past.

“Totality of the Circumstances” is defined in the Code as “whether the totality of the circumstances of the debtor’s financial situation demonstrates abuse.” This is nice and vague, which gives us more options. Obvious situations that fit would be lost employment, reduction in income that is not expected to recover soon, divorce, recently ordered domestic support (child support or alimony) that was not factored into the means test, as well as the fact that the income calculation might include 401K or retirement draws, or other “nonrecurring income” that is not reasonably expected in the foreseeable future.

It is all so individually specific to each particular client that I hesitate to tell you that something will or will not work in your case.

If I see either a special circumstance or a “totality of the circumstances” event, and there is no other good reason to do a Chapter 13 (hey! Another good article topic!), then I will file the case as a Chapter 7, despite the yellow frowny face on my screen. What will happen then is I will get a phone call or email from a paralegal at the United States Trustee’s office about the filing and requesting support for the filing. I will then quickly email to them all the documentation and support I have. The paralegal for the UST will likely come to the creditor’s meeting (about a month after filing) and ask the clients some or a lot of questions about the special circumstances or change in circumstances. They are not being mean, but they have to get those answers recorded so they can justify to their bosses in Washington D.C. why they didn’t throw the book at us.
Filing a Chapter 7 when the presumption of abuse arises because of not passing the means test makes getting through it tougher, but not necessarily impossible. Another option to seriously consider, and is sometimes necessary, is waiting until the six month average is diluted.

How long does it take for the bank to foreclose on my house?

Answer:  On average it takes more than a year.


“The average loan in foreclosure—the process typically starts when a loan becomes 90 days past due and a bank files a complaint—had been in default for 492 days.”


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