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Rights of Debtors in Texas

Debt Collection & Payday Loans

This article explains the protections that debtors have against debt collectors.

Here, learn how the debt collection process works, especially when a creditor is suing to collect a debt. Debtors can protect their interests by participating in the process and being aware that some property cannot lawfully be taken. But debtors may need to take action to assert those protections.

What is a debtor?

A debtor is someone who owes money. A business, corporation, or an individual may be a debtor. You can be a debtor because you borrowed money to pay for goods or services or because you bought goods or services and haven’t paid for them yet. You can also be a debtor because a court said you owe money to someone. This is called a judgment against you. There are two main kinds of debts: secured and unsecured. 

What are secured and unsecured debts?

A person or business that lends money is called a lender. A person or business waiting to be paid because they offered you credit is called a creditor.

A secured debt is secured by property. The property that secures a debt is called collateral. Some common types of collateral are cars, homes, or appliances. The debtor agrees with the lender (the creditor) that if the debtor does not pay on time, the lender can take and sell the collateral item. For example, the lender can take the car if a person does not pay on a car loan. When a lender takes collateral for non-payment, this is called repossession.

Anything that is used for collateral on a secured debt can be repossessed. If a person makes every payment on time, the lender cannot take back the collateral. And after the last payment is made, the person gets a release of lien. A release of lien is a document that confirms that the loan has been fully paid and that the lender no longer has a right of repossession. Mortgages, home equity loans, and most car loans are examples of secured debt.

An unsecured debt is one that has no collateral. For example, a credit card purchase is an unsecured debt. The creditor cannot take the items bought with the card if a credit card bill is not paid on time. Instead, the creditor must try to collect the debt from the debtor.

Important: Credit card debt is usually unsecured. Home equity loans are secured by the debtor’s equity in their home. Many lenders will try to talk people with large credit card debts into getting a home equity loan to pay off the credit cards. Be extremely careful! Paying off the credit card will stop the phone calls from bill collectors, but it just replaces one debt with another, and if you cannot pay the home equity loan, you could lose your house. 

What happens when a creditor takes a person to court?

To take a person to court, the creditor has to file papers (a lawsuit) at the courthouse saying that the person owes money and has not paid. The person or company that files papers at the courthouse first is called a “plaintiff.” The person they have sued is called a “defendant.”

The plaintiff has to pay a fee to have a copy of the lawsuit papers sent to the defendant. Usually, the papers are hand-delivered to the person’s house. Sometimes they are mailed.The front page of the papers tells the defendant they have been sued and must answer the lawsuit by a specific time.

The defendant may also get papers asking them to answer questions or send documents. If this happens to you, answering the questions and sending the requested documents are essential. The defendant also has the right to ask written questions to the plaintiff and ask that the plaintiff send documents. Read Discovery in Texas.

The court staff will set a trial date at the request of the plaintiff or the defendant. At the trial, the plaintiff goes first and tells their story. Then, the defendant gets to tell the other side of the story. (How to handle a case in court can be complicated and is not covered in this publication, although Tips for the Courtroom may be instructive).

At the end of the trial, the judge decides who wins. The paper signed by the judge that says who won a lawsuit is called a judgment. In a case saying someone owes money, the judgment usually says that the defendant owes money to the plaintiff and must pay it back with other fees and interest added.

When a creditor gets a judgment against a debtor, the creditor has to take steps to get the judgment paid. This process is called execution. Execution usually means that an officer of the law comes to the debtor’s home or workplace to take things the debtor owns. The items that are taken are sold to pay the judgment.

The Texas Property Code identifies the kinds and amounts of property that can and cannot be taken to pay a judgment in Texas. Specific federal laws also say what types of property can be taken. If state or federal laws say that a certain kind of property cannot be taken, the property is said to be exempt. The debtor’s right to keep the property is called an exemption right.If the debt was secured, the creditor might not have to go to court to repossess the loan collateral. The collateral must be returned unless the debtor can catch up on the payments and pay additional fees and interest. If the debt is unsecured and the creditor has gotten a court judgment, the creditor may be able to take the debtor’s non-exempt property.

Usually, after a creditor gets a judgment, the creditor sends papers called post-judgment discovery to the debtor. Post-judgment discovery is a set of questions called interrogatories to be answered and a list of documents to be sent to the creditor’s lawyer. It may also include requests for admissions which are a list of statements that are admitted if they are true or denied if they are false. You must answer the questions if you have a judgment against you and receive post-judgment discovery. Many people have money taken from their bank accounts by mistake because they did not fill out and return post-judgment discovery telling their creditors that they do not own anything that creditors can take to pay debts. 

What does “judgment-proof” mean?

\Many people do not have anything a creditor can take to pay a judgment. If you do not own anything that can be taken to pay a judgment against you, you are judgment-proof.

But, even if property is exempt, if the property is collateral for a secured debt, then the creditor can take the property back if you do not make the payments on time.

Can creditors take my house away?

Usually not. If you own the house that you live in, your house is called a homestead. A homestead cannot be taken away to pay your debts except:

  1. When you do not make the payments on a mortgage or home equity loan;
  2. When you do not pay your property taxes; or
  3. When you do not pay for work done on the homestead by a repair person that has a written contract.

A homestead in Texas can be a house and up to ten acres if it is inside a city. A rural homestead can be up to 200 acres for a family and 100 acres for an individual.

More information on homesteads, exemptions, and foreclosures is found in Chapter 41 of the Texas Property Code, the Texas Constitution, Article XVI, and Texas Rule of Civil Procedure 736.

What is personal property?

Personal property is things a person can have that are not land. Personal property with a fair market value of $100,000 for a family and $50,000 for an individual cannot be taken to pay a judgment. Personal property that counts toward the exemption includes furniture, clothes, tools, and equipment, some cars, pets, and some farm animals. However, this does not prevent a secured creditor from taking collateral. Wages, alimony, separate maintenance, and professionally prescribed health aids do not count in the limitations for personal property. This is found in sections 42.001 through 42.003 of the Texas Property Code. 

What wages or income cannot be taken?

Current wagesthose wages that have not yet been paidcannot be taken to pay a judgment in Texas except to pay:

  • court-ordered child support,
  • spousal maintenance,
  • federally guaranteed student loans in default, or
  • federal income taxes owed.

Alimony, child support, and separate maintenance received by the debtor also cannot be taken to pay a judgment. However, once wages have been paid into a bank account, they are no longer considered current wages and are subject to being garnished. 

What about retirement plans or insurance?

In general, money held in a retirement plan is exempt. Nontaxable rollover distributions are also exempt. However, taxable distributions are not exempt as soon as they leave the plan administrator. This means that the retirement money held in the plan is exempt, but most monthly payments to the retiree are not. Taking a lump sum retirement distribution may be risky if a creditor has a judgment against a retiree. For more information, see Texas Property Code 42.0021.

Life, health, or accident insurance benefits are usually exempt unless the insured person pledged the policy proceeds to secure a debt. 

What about my retirement from the government like VA benefits or Social Security?

The federal law exempts most federally funded retirement or disability benefits, including SSI, Social Security, VA benefits, civil service retirement, Foreign Service retirement, and longshoremen and harbor worker’s compensation. If government benefits are directly deposited into a bank account, and no other money goes into the account, the money in the account cannot be taken to pay a judgment. If this applies to you, notify your bank by sending an anti-garnishment letter.

An anti-garnishment letter tells the bank that the account only holds income from an exempt government retirement plan or benefit program. It is essential to be sure that the benefit is the only income in the account. If your Social Security is electronically deposited into your bank account, the bank should automatically look at what exempted amount was deposited within the past two months and allow you, the account holder, access to that amount. Even if the exempt funds are mixed with other funds in the bank account, the bank is responsible for protecting the total exempt amount. Also, whether a co-owner is on the account does not make a difference.

Important: Even benefits that are usually exempt can be taken to pay the following debts: debts owed to the federal government, outstanding child support payments, federal and state income taxes, HUD and SBA loans, and guaranteed student loans.

What about student loans?

All statutes of limitation have been abolished with regard to student loan debt. This means there is no time limit to stop the collection of unpaid student loans. Many debtors are surprised when money is taken out of their Social Security checks to repay old student loans. Tax refunds and other federal benefit payments can also be used to pay delinquent student loans. The government can take money out of a person’s monthly benefits to pay back money owed to the government. This is known as an offset.

Can I transfer or give away property to prevent creditors from taking it?

No. It is illegal to convert non-exempt property to exempt property to defraud, delay, or hinder a person who has a claim to the property. In other words, it is illegal to give away property to keep from paying a debt. It is also unlawful to change who owns property with the intent to hinder, delay, defraud, or prevent a creditor from receiving the property's fair value when you cannot pay your debts. In other words, it is illegal for a debtor to give away property to make the debtor judgment-proof.

If I am married, am I responsible for my spouse’s bills?

Texas is a community property state. Community property is anything that the couple acquired while they are married. Sometimes, a married person may have to pay the debts of his or her spouse. For more information, see Texas Family Code sections 3.202 and 2.501.

Community property can usually be used to pay a spouse’s debts incurred during the marriage.  A person is liable for the debts of his or her spouse for basic necessities such as food, clothing, shelter, and medical expenses. Separate property is anything that a person owned before they were married or that is inherited during the marriage. A person’s separate property is not usually taken to pay the debts of a spouse unless both people owe the debt, for example when both spouses have signed a contract. 

What if I file for bankruptcy?

If you file for bankruptcy, you can choose to use the exempt property rules under the federal bankruptcy law, or you can use the Texas exemption laws. When you officially file for bankruptcy, you stop or “stay” all civil lawsuits and actions, including IRS collection attempts against you. This stay only lasts for a limited time. Bankruptcy hurts your credit record. Bankruptcies stay on a person’s credit record for ten years.

Read Bankruptcy: Is It the Right Choice?

Debt Collection Responses

There are different ways to respond appropriately to debt collectors.

When contacted, find out the following:

  • Identity of the debt collector, including name, address, and phone number
  • The amount of the debt, including any fees such as interest or collection costs
  • What the debt is for, and when the debt was incurred
  • The name of the original creditor
  • Information about whether you or someone else may owe the debt.

When a debt collector first contacts you in writing regarding a debt, it must provide you a written notice that has certain, legally-required information. If the collection agency first contacts you by phone, insist that they contact you in writing. Do not give personal or financial information to the caller until you have confirmed it is a legitimate debt collector.

Learn more by reading What should I do when a debt collector contacts me? by the Consumer Finance Protection Bureau.

What property can the IRS take?

State exemption laws do not bind the Internal Revenue Service. Outside of bankruptcy court, the only property that the IRS cannot take is:

  1. School books and most clothes;

  2. Fuel, food, furniture, and personal items up to a certain amount;

  3. Some books and tools used in your work;

  4. Unemployment benefits;

  5. Undelivered mail;

  6. Some annuity and pension benefits;

  7. Some kinds of disability payments;

  8. Worker's compensation;

  9. Salary, wages, or other income used to pay court-ordered child support;

  10. Some public assistance payments;

  11. A minimum weekly amount to live on.

    Source:  IRS Publication 594: The IRS Collection Process. 

    This publication was made possible through grants from the State Bar of Texas Real Estate, Probate, and Trust Law Section and the Litigation Section.

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