I'm Tom Black, Attorney at Law. I'm Board Certified in Consumer Bankruptcy Law by the Texas Board of Legal Specialization. I am licensed to practice law only in Texas, and laws concerning lawsuits and judgments vary from state to state. So if you are not being sued in Texas, this information is not be for you; consult an attorney in your state.
In any event, if you are facing a lawsuit or judgment at this time, you should IMMEDIATELY consult with an attorney to represent you in the place where the lawsuit or judgment is pending. Time can be very important.
Please keep in mind that this information is general information only, and is not legal advice for your particular legal problem. ONLY after you've met with me or another attorney experienced in these matters can you receive legal advice tailored to your particular situation.
If you meet with me or any attorney about a legal problem, the information that you give the attorney is absolutely privileged and will not be revealed to anyone without your consent. Please always give your attorney full, complete, accurate information so that he or she can give you competent help and advice.
I'm giving you a lot of information here, so let me tell you briefly what I'm going to tell you. First, I'll tell you what a lawsuit is and how it works. Next I'll tell you what to do, what happens if you don't do anything, how to fight.
I'll tell you what a judgment is, and it's effect on your credit and property. I'll tell you how creditors go about collecting judgments, and what all they can do to you. I'll tell you next what property you can keep from creditors, your exemptions (at least in Texas). I'll tell you how to possibly work it out with a creditor, by way of an Agreed Judgment or compromise. Finally, I'll explain a little about bankruptcy, the relief available, how it works, and effect on your credit.
What is a Lawsuit?
If you're reading this information, you've probably been served with a lawsuit. A lawsuit is a legal proceeding commenced in a court by the filing of a petition. A petition is a legal document asking the Court for relief. After the filing of the petition, the court issues another paper called a citation or summons, and it is "served" upon you, that is, handed to you in person, by a constable or a private process server appointed by the Court.
If you were sued in Justice Court or Small Claims court, here in Texas you have until the Monday after the 14th day following the date that you are served in which to file a written answer with the Court. If you were sued in County or State district court in Texas, you have until the Monday next after the expiration of 20 days in which to file an answer.
The purpose of the lawsuit is usually to have a judge determine whether you owe the plaintiff money, and if so, how much. Once someone has a judgment against you, they can use certain legal powers to force you to pay the debt (or at least try). I'll discuss some of these powers later.
Now the type of lawsuits that I'm discussing here involve collections, where you are being sued for a debt. Other types of lawsuits, such as personal injury suits, have similar rules, but I'm specifically discussing only debt collection suits here.
What Happens When I Am "Served with Papers"?
After you're served (handed) the lawsuit and the summons by the sheriff, constable, or process server, I recommend that you hire me or another lawyer, pronto. Because if you fail to answer a lawsuit, the plaintiff, say the bank or finance company, whoever is suing you, will obtain a default judgment against you. They win because you didn't timely answer.
If a default judgment is granted against you, the Court (the judge) will sign a court order called a judgment, that says that you owe the plaintiff whatever sum of money it is. The judgment "judicially determines" that you owe the money. After a certain period of time, the judgment becomes "final and non appealable," not subject to any further legal challenge.
More than likely, the judgment will also order you to pay the plaintiff's attorney's fees, court costs, and interest that accrued up to the time of the suit. This will probably increase the amount that you owe by 1/3 or 1/2. Not only that, but the judgment will probably recite that you also owe interest that accrues after the date of the judgment, usually at the contract rate, whether it's 18% or whatever.
This interest continues to run until the judgment is paid, or becomes unenforceable by lapse of time. Just to give you an idea, at 10% the judgment will double in about 7 years; at 18% it doubles in 4 years! And every 4 years after that!
If you dispute owing the money, or have any valid defenses or counter-claims against the plaintiff, you should hire either myself or another attorney to represent you. Do this as soon after you are served with the lawsuit as possible, to give your attorney as much time as possible to investigate and prepare your case.
If you have claims against the person or institution that is suing you, for usury, deceptive trade practices, unreasonable collection practices, or other possible defenses or counter-claims, and don't raise them in the lawsuit, you may lose the right to assert them forever.
Your attorney will then file appropriate papers with the court, and present your defenses and any counterclaims against the plaintiff. If there is no settlement, there is a trial. If you win, fine. If you lose, there is then a judgment against you.
What Is a Judgment?
A judgment is basically a judicial decision that you owe a certain amount of money. The judgment, in and of itself, doesn't harm you. It is a piece of paper. They don't put you in jail for having a judgment against you. Many, many people have unpaid judgments against them, particularly in Texas. However, it can have serious implications for you.
The granting of a judgment against you does show up on your credit report, and can legally stay on your credit report for 10 years, even if it's later paid in full. If paid, then the notation "Paid" should show up, next to the judgment on the credit report. If a judgment is not paid within the 10 years, then it can be renewed by the plaintiff for another 10 years, and so on. Judgments are not always renewed, and frequently become time-barred when they're not collected and not renewed at the end of the first 10 year period.
How Are Judgments Collected?
Unless you have a lot of property, it can be difficult for someone with a judgment against you to collect it from you in the state of Texas. In olden days, people actually moved to Texas to avoid creditors. People in trouble with their creditors would write "GTT" on their cabin doors in chalk, for "Gone to Texas" and the creditors would often give up on collecting the money. The property you're allowed to keep from creditors in Texas is quite extensive.
In Texas, our State Constitution prohibits wage garnishment (by Texas employers), which is the most effective way of collecting judgments against consumers in other states. Your wages can be garnished for child support, and your paycheck can also be garnished for unpaid federal debts student loans and other federal debts.
Also, the IRS can levy on your paycheck for back taxes. But regular creditors, those with judgments for debts not based on any of these things, have to try to collect from other assets of yours besides your paycheck.
Now, it's important to understand that once you deposit your paycheck into your bank, it's no longer considered wages. In fact, once it's in your bank, it's fair game and a judgment creditor can have a Writ of Garnishment issued from the Court, which freezes those funds. You have the right to a hearing, but normally the money ends up going to the creditor. If you have checks out on those funds, it's just too bad, the checks bounce. It's a mess.
Therefore, it's not a good idea to have money in a bank or credit union checking or savings account if you have a judgment against you. It could be garnished.
One important thing that happens after someone gets a judgment against you is that they usually record an "abstract" or summary of the judgment in the county real property records. This creates a lien on any non-exempt real estate that you own in that county, and the recording of the judgment also gives public notice that you have a judgment against you.
What is a Writ of Execution?
No, you are not executed for having a judgment against you. But if you have any non-exempt real estate, such as a lake lot, rental property, or any other real estate that is not your homestead, then it's fair game, and can be sold by the sheriff to satisfy the judgment. It's sold under what's called a "Writ of Execution"- Sounds pretty bad, doesn't it? Even if the judgment creditor doesn't sell it, you will not be able to sell it without first paying the judgment.
Now, your homestead, so long as it meets the definition of homestead under Texas law, cannot legally be sold to pay the usual judgment creditor. However, you'll find it difficult to sell your homestead if you have a judgment against you, because a title company will not insure your title. A title company will insist the judgment be paid at closing, or that they be provided with a court order that judicially determines that the property is your homestead. A judgment creditor may give you a "partial" release of judgment lien if you can prove to their satisfaction that it is, in fact, your homestead.
What is Garnishment?
A judgment creditor can also serve a Writ of Garnishment on other people that owe you money. For example, if you have a small business, and the creditor knows your customers, they can have a writ of garnishment served on the customers that owe you money, and they have to pay the creditor, not you.
What is "Post-Judgment Discovery"?
A judgment creditor may do a lot of other unpleasant things to you- it really depends upon how aggressive and competent the attorneys are that represent them. If the judgment creditor's attorney really knows what he or she is doing, and works hard to collect the money, then you've got a problem.
For example, they can get a court order ordering you to turn over your tax refund. They can also have you ordered to appear for a deposition where you have to show up and answer questions under oath, and disclose exactly what you own and where it is. These depositions can be held either at the courthouse, the lawyer's office, or somewhere else.
Once you have a judgment against you, the judgment creditor's attorney can also send you written questions that you have to answer under oath, and they can also make you provide all kinds of detailed financial information, such as tax returns and bank statements.
You can't be put in jail just for owing a debt in Texas (except for child support), but you can be put in jail for contempt of Court, such as by not turning over your tax refund if you've been ordered to do so by a judge, or haven't shown up at a court-ordered deposition, or answered written questions or produced documents, once ordered by a Court.
In short, having a judgment against you can be a real hassle. And you're never getting anywhere. The interest keeps ballooning how much you owe, and if you ever get anything, an inheritance or if you start a business, the judgment creditor may show up with a court order to grab it. Your credit will be goofed up with the judgment for as long as it's on there. What's there to do?
Dealing with Lawsuits and Judgments
Obviously, the first option to resolve the lawsuit or judgment is to pay the debt. Depending upon the creditor, they may be willing to enter into an Agreed Judgment, agreeing to accept the money in installments, over a period of time. Sometimes they will agree to waive or reduce the amount of attorney's fees and costs sought by the lawsuit if you voluntarily agree to make payment.
Another option is to make an offer of compromise and settlement, where you offer a smaller lump sum to settle the debt in full. Perhaps you could borrow the money to settle the matter from friends or relatives.
One problem with settling debts in this manner, is that a creditor may insist upon financial information from you, before accepting the settlement agreement, showing that you can't afford to pay it in full. Suppose you offer to settle a $10,000 debt for $5,000. The bank you owe the money to says, fine, but we need a financial statement filled out that shows your assets, and income and expenses.
Then they look at your budget, and you've got another $150 a month that you can afford to put on the debt. So now the creditor wants $5,000, and $150 a month for 3 years. And not only that, but now you've given them detailed financial information that they can now use to more effectively collect the money from you, if you don't settle on their terms. So, settlement is not always possible.
One more disadvantage to compromising debts in this manner, is that if someone forgives a debt that is owed, then that can be considered income to the person whose debt was forgiven. So, you settle a $10,000 debt for $3,000, it is likely that the creditor would then send a Form 1099 to the IRS, so you would then owe taxes on the $7,000 debt forgiven. There is no such "income from debt forgiveness" if you file bankruptcy, or if you can show that you were insolvent on the date the debt was forgiven.
One option in dealing with a lawsuit for debt, or a judgment if it's gone that far, is to file a personal bankruptcy. Over 1,000,000 people file personal bankruptcy in the U.S. each year. Yes, even if a creditor already has a judgment against you, it's not too late to file a bankruptcy.
However, there may be other reasons particular to your case that we would want to file your case before a judgment is obtained - so, if you've been served with a lawsuit, and filing bankruptcy is a possibility, please make an appointment to see me or another experienced bankruptcy practitioner ASAP.
As soon as any type of bankruptcy is filed, an automatic stay, or court order goes into effect, that immediately stops all lawsuits and other debt collection actions against you.
What is Chapter 7?
In a Chapter 7 bankruptcy, the most common type of bankruptcy filed, basically you trade any non-exempt assets that you have for a discharge or cancellation of your debts. Generally speaking, in Texas, most middle class people have little or no non-exempt property that can be taken away from them by a bankruptcy trustee, the court official appointed by the bankruptcy Court to administer your case.
We can claim as exempt from the claims of your creditors, your homestead, a vehicle for each licensed driver, personal property including appliances and furniture, etc., jewelry, and retirement plans. You do normally still have to pay the mortgage on your house, and payments on vehicles and other secured debts.
Once the Chapter 7 is filed, all of your earnings are yours to keep; your creditors have no claim on them. You can start businesses, have bank accounts, start fresh. That's the whole idea of Bankruptcy- to give people a new beginning, so they don't spend their lives living under insurmountable debt.
It's important to know that if most of your debts are consumer debts, i.e. debts incurred for personal, family or household purposes, as opposed to business or tax debts, filing Chapter 7 is now "means-tested." If your income is over certain limits, you may or may not qualify for Chapter 7. When you come in and consult with our office, we will review your income and expenses to see if you qualify for Chapter 7.
If you qualify to file Chapter 7, at the end of the Chapter 7 case, usually in 3 or 4 months, you receive an official Order of Discharge from the Court that cancels your dischargeable debts. Not all types of debts are cancelable in Chapter 7. Debts incurred through fraud, debts for intentionally hurting someone or their property, income taxes less than 3 years old, student loan debts except in very limited circumstances, and certain other debts cannot be canceled in Chapter 7. We will review your debts with you when you come into the office, to see which or your debts may be discharged, and which cannot, if any.
What is Chapter 13?
Chapter 13 is another Chapter of the Bankruptcy Code available to handle lawsuits or judgments. In a Chapter 13, you pay your disposable income, the amount of money you have left over after paying your necessary living expenses, to a Chapter 13 Trustee, an official appointed by the Court. He then pays your creditors, and the difference, what can't be paid by your payments, is canceled at the end of your 3 to 5 year plan.
Chapter 13 can have many advantages to Chapter 7, depending on your case. More types of debts can by canceled. You can use Ch 13 to stop foreclosure and catch up a house note, stop repossession and pay a car or other secured property off over time, or pay taxes out over time with either no interest or greatly reduced interest, followed by a discharge of your unsecured debts, just like in Chapter 7.
What About Credit After Bankruptcy?
A bankruptcy can stay on your credit for most purposes for 10 years, but at least by filing bankruptcy you no longer owe the money, and if you come into some money you don't have to be concerned about someone taking it from you. And most people who are otherwise credit-worthy can re-establish credit within two years or so following a bankruptcy.
I have had clients solicited for new credit cards while still in a bankruptcy. In any event, even if you aren't offered an unsecured credit card, you can obtain a "secured" Visa or MasterCard soon after a bankruptcy, by putting up a deposit equal to the amount of credit you want, as little as $250.
By paying your future bills on time, you re-establish a new history of regular payments that future potential credit grantors can rely on in granting you credit. They all want to give you credit-- you just have to give them a reason to do so.
There are mortgage companies that will grant mortgages to people who have been out of bankruptcy as little as 6 months. And having a bankruptcy on your credit will no longer automatically keep you from financing a vehicle, but you will probably pay a higher interest rate or a bigger down payment.
Well, I hope this information has been helpful to you. To make an appointment with me to discuss your financial problems, or a pending lawsuit or judgment, call my office during business hours at 713-772-8037 and make an appointment to see me. There is no charge for the first consultation.
For directions to my office, see the map available on this web site. There is free parking and I also offer appointments on Saturdays. Please down load a questionnaire, and fill it out and bring it to your first consultation with me. Thank you.
I'm Board Certified in Consumer Bankruptcy Law by the Texas Board of Legal Specialization.