There are many situations where a person may face overwhelming debt that they are unable to repay. In these cases, a person may need to deal with harassment from creditors, who may do everything they can to collect what is owed. In some cases, creditors may pursue legal action, and a debtor may worry that their wages may be garnished or that a creditor may attempt to freeze their bank account and prevent them from accessing or spending the money they have earned. By understanding how these cases are handled in Texas, debtors can determine their best options for addressing these issues.

Wage Garnishment and Attachment

In much of the United States, creditors may pursue judgments against those who owe them money, and if a court rules in their favor, they may be able to garnish a person’s wages. In these cases, a percentage of the person’s income will be withheld from their paychecks and sent to the creditor. However, Texas limits the types of cases where wage garnishment is available. Generally, wages can only be garnished to pay child support or spousal support that is past due. The IRS can also garnish wages to collect tax debts, and wage garnishment may also be available for student loans.

Since most creditors will be unable to use wage garnishment, they may instead pursue a writ of attachment against a debtor. In these cases, they will seek to “freeze” a person’s bank account(s), preventing them from making withdrawals or transfers. They may then look to seize some or all of the funds in an account in order to cover the debts that are owed. 

A person who is struggling to pay their debts can gain many benefits by filing for bankruptcy, and the automatic stay is one of the most helpful of these benefits. This stay will go into effect as soon as a petition is filed in bankruptcy court, and it will prevent creditors from taking any actions to collect debts owed by the debtor. In addition to private creditors, such as mortgage lenders or credit card companies, the automatic stay applies to the IRS. Taxpayers who owe tax debts will want to understand what types of actions the IRS can and cannot take during the bankruptcy process.

The Automatic Stay and Tax Levies

There are a variety of methods that may be used to collect taxes. IRS tax levies may involve the garnishment of a person’s wages, the seizure of funds in a person’s bank accounts, or the offsetting of tax refunds that are due to a debtor. When a person files for bankruptcy, the automatic stay will prohibit the IRS from the beginning or proceeding with any of these tax levies. 

Specifically, the IRS is prohibited from:

One of the benefits of filing for bankruptcy is that doing so places an automatic stay on collection actions by creditors. This means that creditors will be prohibited from making any attempts to collect debts while the bankruptcy case is ongoing, including contacting a debtor through phone calls, letters, garnishing their wages, or foreclosing on a person’s home. The automatic stay gives a person the opportunity to assess their financial situation and determine their options during the bankruptcy process without the requirement to repay certain debts during this time. However, there are certain types of exceptions to the automatic stay, and a person will need to understand how these will apply in their case.

Issues That Are Not Affected by the Automatic Stay

The following types of actions are not covered by the automatic stay in a bankruptcy case:

• Criminal cases - If a person is facing criminal charges, filing for bankruptcy will not affect these proceedings, and it will not stop the collection of fines, fees, or restitution that a person is ordered to pay to a victim.

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Homeowners who have experienced financial difficulties may struggle to make payments on multiple debts, including their mortgage. Those who have missed payments may be facing the threat of foreclosure, as well as harassment from other creditors seeking to recover payment for the debts that are owed. In this type of situation, a homeowner may be considering bankruptcy, but they should also be aware of other alternatives that may be available, including completing a short sale of their home. 

Benefits and Drawbacks of a Short Sale

The real estate market often experiences fluctuations and a home may lose value for a variety of reasons. When a home is “underwater,” meaning that more is owed on the mortgage than the home is worth, the homeowner may be able to complete a short sale. In this type of sale, the home will be sold for its current market value, and the borrower may be released from the requirement to pay the additional amount owed on the mortgage.

A homeowner will usually need to receive approval from their mortgage lender to proceed with a short sale. The lender may require the borrower to demonstrate that they have experienced financial hardship that has caused them to be unable to pay what is owed. While a short sale will result in the lender receiving less than the full amount of the loan, it may be a preferable option to pursue a foreclosure, since it will avoid legal fees and the requirement to complete proceedings in court.

There are many reasons why homeowners may struggle to make ongoing mortgage payments while also covering other necessary expenses. This has been a major concern during the COVID-19 pandemic, which has led many people to lose their jobs or suffer other financial setbacks. While bankruptcy may be an option for some who are unable to repay their debts, homeowners should also be aware of the various alternatives to bankruptcy that may be available. These include requesting loan modifications that will allow them to maintain ownership of their homes while ensuring that they will be able to make affordable payments.

Types of Loan Modifications That May Be Available

Debtors who have experienced financial hardship, such as the loss of a job or health issues that have led to increased medical expenses, may be able to qualify for a loan modification. The eligibility for a modification and the types of modifications that may be available will vary depending on the lender. Typically, a debtor can apply for a loan modification if they have missed one or more payments. Potential loan modifications may include:

• Forbearance - A homeowner may request a “pause” on their payments during a period of financial hardship. If forbearance is granted, these payments will need to be made up, either by adding them to the end of the loan or by temporarily increasing the number of monthly payments after the forbearance period ends.

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