There are very few states in the US that are debtor-friendly. In most states, it is much easier for debt collectors to collect unpaid debt than it is for debtors to protect assets and their homesteads. There are some federal exemptions for debtors in the US, however, most states adopt their own regulations on debtor and creditor protections.
Texas is considered a debtor-friendly state. This is because there are several protections for debtors that are not found in other states, mainly the homestead exemption. When coming up against debt collectors, debtors in Texas can guarantee that at least some of their personal property and assets will be protected under law from being seized to repay debt.
However, Texas citizens should always take measures to protect assets if they owe money to debt collectors or are the subject of a debt collection lawsuit. Although there are many protections under Texas law, you are still at risk of losing money from your bank account at an unlimited rate.
Ronald Arthur Stearns Sr. PLLC
To understand debtor-friendly laws in Texas and to figure out your rights in debt collection lawsuits, contact Ronald Arthur Stearns Sr. PLLC today. Our law firm has been helping Texas citizens fight against debt collectors for many years. We have a deep understanding of Texas and federal law on debt collection and we know how to protect debtors and their property.
When your personal property and assets are at risk, you need strong legal representation to ensure you are protected. Ronald Arthur Stearns has an A+ Better Business Bureau Rating (BBB) and has been recognized by the State Bar of Texas and the American Bar Association. He dedicates his career to protecting taxpayers’ rights and helping ensure that people can get out of difficult financial situations.
Call our law firm today to schedule a consultation at 210-853-2135.
Secured vs. Unsecured Debts in Texas
There are two types of debt in Texas: secured debts and unsecured debts. Secured debt has collateral property attached to it. So, if you default on payments and cannot pay back the debt, the property is used to pay it back. Secured debt is an agreement between the debtor and the collector that their property will be seized for failure to pay the debt.
So, if you buy a property and take out a mortgage, and you cannot pay this mortgage, the bank reserves the right to take the property to pay back the mortgage. If you purchase a car using a loan and cannot pay back the loan, the financial institution can seize the car to sell it and recover the debt. This is referred to as ‘repossession’ under Texas law. Once you pay back the money you owe for a secured debt, the lien is released and you gain full rights to the property.
In comparison, unsecured debt is not secured by collateral property. The main types of unsecured debts include credit card debts, medical bills, and other consumer debts that do not directly result from a property. When a person does not pay back an unsecured debt, it is more complicated for collectors to recover this debt.
There are many laws in place that protect Texas taxpayers from losing their property and assets because of unsecured debt. Often, collectors try to persuade debtors to take out a home equity loan to pay back their unsecured debt, because they cannot take your property otherwise. If you have an unsecured debt, you have more protection over your assets than with a secured debt.
Protections For Debtors in Texas
Texas is one of the most debtor-friendly states in the US because of several protections afforded to debtors under the law and the state constitution. The aim of debtor-friendly laws is to ensure that citizens do not go into severe financial hardship because of unpaid debt.
In most states, the priority of creditors to recover unpaid debts takes precedence over citizens to keep their homes. However, the following protections make Texas a significantly easier state to handle debt and a lot more friendly toward debtors:
The homestead exemption is primarily why Texas is considered a debtor-friendly state. This exemption protects your home residence from being used to repay a debt to creditors. Under the homestead exemption, creditors cannot seize your home to fulfill a debt. On top of this, Texas citizens get tax breaks and protections on their primary residence and can get a rebate each year.
Homestead exemptions are protected under the Texas constitution and the Texas Property Code. Although federal bankruptcy law has limits on the size of homesteads that qualify under the exemption, there are no limits on the size of your property under Texas law. There are some different limits on acreage between urban and rural properties. However, rural property gets up to 200 acres protected for families.
The homestead exemption applies only to unsecured debt. If you have a mortgage on a property or you take out a home equity loan, your home can still be repossessed. Once you default on your mortgage payments, a bank can begin foreclosing on your home. There are options available in these circumstances, however, such as applying for forbearance to buy some time.
It is important to note that the homestead exemption is only available to individuals in Texas. A limited liability company (LLC) or other business entity cannot avail of this exemption. If you are a business in debt, there are other protections available to you under the law.
The Snap-Shot Rule
Texas law extends the homestead exemption to people who sell their personal property before declaring bankruptcy. The snap-shot rule provides that your homestead is determined the day you file for bankruptcy. However, if you sell your home before filing bankruptcy to purchase a new, more affordable homestead, this is still included in the homestead exemption.
To qualify for this exemption, you must sell your original exempt property and purchase a new residence within six months. If you do not use these proceeds to purchase a new residence within six months, you will not qualify under this exemption.
This rule provides added protection to Texas citizens. Often, people who fear bankruptcy sell their homes and purchase a smaller property to avoid a difficult financial situation. This provision allows people to do this and does not penalize them for it. So, if you sold your homestead and bought another property within six months, you will receive the same protections under the homestead exemption.
Asset protection is not exclusive to the homestead exemption in Texas. There are added protections for other types of property in debt collection lawsuits. Under Texas law, a debt collector cannot seize the following to repay debt:
- Up to $50,000 of personal property for an individual.
- Property with a fair market value of up to $100,000 for families.
- Social security benefits.
- Veteran benefits.
- Retirement accounts for some sectors, including Railroad Retirement Board Benefits.
- Worker’s compensation benefits.
- Unemployment benefits.
- FEMA disaster benefits.
- Child support and spousal maintenance payments.
- Pension payments.
- Health aids.
- Temporary Assistance For Needy Families (“TANF”).
- Education savings account.
- Health savings account.
- Life insurance and liability insurance.
Debtors can also keep personal property such as home furnishings and heirlooms, clothes, jewelry, two firearms, animals up to two horses or twelve cattle, one motor vehicle for each family member, household pets, and unpaid commissions for personal services. Exempt property is also protected from a bankruptcy trustee during the liquidation of your assets.
Wage garnishment is when your incoming wages are taken to pay back unpaid debt or taxes. Under Texas law, creditors cannot garnish wages to recover money owed for consumer or civil debt. The only time wage garnishment is permitted is for unpaid child support, federal taxes, student loans, and spousal maintenance payments.
If you owe money for credit card debt, home equity loans, a mortgage, or other consumer debt, your incoming wages are not at risk of being garnished. There are also limits placed on how much can be garnished from your current wages to pay for debts to the federal government. Creditors can usually take up to 25% of a person’s disposable earnings or thirty times the minimum wage, depending on if it is larger than 25%.
With wage garnishment, your employer receives notification from the creditors and is required to deduct the garnishment from your wages each month, pending a court order. You will receive fewer wages each month until the debt is paid off. You may negotiate a payment plan if your financial situation improves, with the help of an attorney.
Although creditors for consumer debt cannot directly garnish your wages, they can garnish your bank accounts. If a creditor can get a bank account garnishment order from a court, they can take your current wages directly from your bank account, alongside other personal funds and savings that you have.
Social Security Benefits
Social security benefits are given extra protection under Texas law. Often, creditors can get around the wage garnishment exemption by getting a court order for bank account garnishment. Because there are no limits on bank account garnishments, creditors can recover an unlimited amount of debt from people’s accounts for an unlimited time until their debts are paid off.
However, if a person receives federal benefits, such as social security benefits, student loan payments, unemployment benefits, spousal support, or worker’s compensation, this cannot be garnished from their accounts. These are considered exempt assets under the law and are afforded extra protections.
Therefore, if a person owns a personal property outright, received unemployment benefits, federal benefits, or spousal support payments, owns little personal property with a value under $50,000, and does not have any non-exempt property, it will be extremely difficult for a creditor to recover a debt from them and their accounts.
Statute of Limitations
There is a statute of limitations in Texas for filing a debt collection lawsuit against a debtor. To use aggressive means to recover debt, such as bank account garnishment, creditors must sue the debtor in court and give them notice to respond to the lawsuit before appropriating their property.
However, if they do not file a lawsuit within four years of the date of default on the debt, they lose their rights to do so. The statute of limitations in Texas protects debtors against “zombie debts” that have been sold off to third-party debt collectors. If you stopped paying back a debt many years ago with no repercussions, a collection agency cannot appear out of the blue and demand that you pay.
New laws introduced in 2019 also protect debtors against time-barred debts. Previously, if a debt collector misled you into making a payment on an old debt, this would restart the clock on the statute of limitations. However, Section 392.307 of the Texas Finance Code provides that making a new payment on an old debt does not restart the clock. Once the statute of limitations has passed, a debt collector cannot sue a debtor for unpaid debt.
Texas Debt Collection Act
Besides protections offered to debtors, such as the homestead exemption and other asset protection measures, the Texas Debt Collection Act protects debtors against unfair debt collection practices. Collection agencies often engage in manipulative, persuasive, and unfair tactics to recover debts from people. This includes harassing people, threatening debtors with arrests, and lying about their identity to recover debts.
Protections For Debtors Under The Act
The Texas Debt Collection Act adopts the federal law Fair Debt Collection Practices Act, however, it extends protections against the original creditors as well as third-party collection agencies. Some prohibited behaviors and debt collection practices under this act include:
- Harassment, such as calling before 8:00 am or after 9:00 pm, calling family members and friends about your debt, or repeatedly calling you or your place of work.
- Oppressive or abusive conduct.
- Misrepresentation, such as pretending you are a federal agency or that you have powers to impose penalties for non-payment.
- Using unfair methods to collect a debt.
- Trying to collect a debt that is not owed.
If creditors or collection agencies violate the protections set out under this Act, they can face civil and criminal penalties. A debt collector must follow the correct procedures when recovering debt, including notifying the debtor that they are filing a lawsuit, giving them ample time to respond, and providing written correspondence of all attempts to recover debts.
Becoming Judgment Proof in Texas
Becoming judgment-proof in Texas is a way to avoid your property and income being seized to pay back debt. Many people believe that filing for bankruptcy is the only option for escaping a lot of debt. However, if the courts determine you are judgment-proof, you can avoid losing your assets until your financial situation improves.
If you only own exempt property, such as a primary home, minimal home furnishings, a vehicle, and property up to $50,000, you can become judgment-proof. A creditor or collection agency cannot sue you to recover this property unless your financial situation improves within ten years. If your financial situation improves, they can apply to a court to garnish your bank accounts or take other assets that are not exempt.
If you believe you are judgment-proof and are entitled to asset protection, speak with an attorney as soon as possible. They can assess your situation and apply to the courts to ensure that your personal assets are not seized by collectors to pay for debts.
Do State Exemptions Apply To The Internal Revenue Service (IRS)?
Although there are many protections for debtors against creditors and collection agencies in the state of Texas, these exemptions do not apply to the Internal Revenue Service (IRS). When you owe a debt to the federal government, whether for unpaid taxes, child support, or a federal student loan, you have different obligations than for consumer debt.
The IRS has the power to seize your homestead and other personal property if you do not pay the money that you owe, including unpaid property taxes. In most circumstances, the IRS will issue a levy on your bank account or garnish your wages before they take your property to pay back taxes. When there are serious cases, such as tax fraud, hidden assets, or payroll tax issues, the IRS may seize your property.
Usually, the IRS prefers a property lien over a levy. A lien is a claim over your property that protects their interests in the property. If you sell your home while it has a lien on it, the IRS will receive the proceeds to pay for the debt you owe. A lien does not mean a forced sale, and you can take other measures to pay back taxes such as setting up a payment plan.
If you owe money to the IRS, the best thing to do is contact an attorney as soon as possible. There are many options available to debtors in Texas for paying back taxes to the IRS. A lawyer can assess whether you are entitled to tax relief or if you can get your debt settled for less than you owe through an Offer in Compromise or another payment plan.
What Are Judgment Liens in Texas?
Although Texas citizens have the homestead exemption, which protects their property from being seized to repay debt, creditors can still get judgment liens against the debtor. When there is a lien on your property, it means that the creditors have some say in what happens to the property, until the lien is released.
Because of this, it is more difficult to sell property with judgment liens. So, if you try to sell or refinance your home because you are in financial hardship, you will face difficulties if a lien has been issued against the property. Even with an exempt asset, having a judgment lien means you do not have the same freedom over your primary residence.
An experienced attorney can help you negotiate with a creditor to partially release the lien and allow you to sell your home or refinance it. However, you are still obliged to pay what is owed on the lien before you get full rights back to your property.
Is Texas a Debtor-Friendly State?
Compared to most states in the US, Texas is a debtor-friendly state. There are many different protections afforded to debtors when dealing with creditors. Many debtors worry they will lose their homes, retirement plans, and all of their personal property because of unpaid debt. However, in Texas, there are laws in place to ensure that this does not happen unless it is for debt to the federal government.
If a person owns the property, has exempt personal assets, and receives federal benefits, they are quite protected against debt collectors in Texas. Their bank accounts may still be garnished to recover debt, however, there are measures in place to ensure that people do not go into complete financial hardship over consumer debt.
Contact Ronald Arthur Stearns Sr. PLLC Today!
If you owe a debt to creditors in Texas and are worried about losing your assets, contact Ronald Arthur Stearns Sr. PLLC today. With over 26 years of experience helping Texas citizens, he knows how to protect you and your assets against unfair debt collection practices. Texas has debtor-friendly laws in place that need to be protected, and Ronald Arthur Stearns Sr. PLLC is committed to protecting these laws.
Throughout our years of practice, we have built a strong attorney-client relationship that is grounded in strong legal representation, good communication, and protection of our client’s rights. Ronald Arthur Stearns Sr. PLLC has never worked for the IRS and his priority is protecting taxpayers. He can help you deal with debt by coming up with a payment plan and ensuring that your assets remain protected.
Call our law firm today for an initial consultation at 210-853-2135.