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Rights of Debtors in Texas

Debt Collection & Payday Loans

This article tells you about protections you have as a debtor against those trying to collect on a debt. This article discusses only individual consumer debts.  This article was written by the Legal Hotline for Texans at the Texas Legal Services Center.

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 that is waiting to be paid because he 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 (creditor) that if the debtor does not pay on time, the lender can take and sell the item that is collateral. For example, if a person does not pay on a car loan, the lender can take the car. 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. If a credit card bill is not paid on time, the creditor cannot take the items bought with the card. 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 his or her 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 are unable to 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 that he (the word “he” also means she) has been sued and that he has to answer the lawsuit by a certain time. The defendant may also get papers asking him to answer questions or send documents. If this happens to you, it is important to answer the questions and send the documents that are asked for. The defendant also has the right to ask written questions to the plaintiff and ask that the plaintiff send documents. A trial date will be set by the court staff at the request of the plaintiff or the defendant. At the trial, the plaintiff goes first and tells his side of the story. Then, the defendant gets to tell his side of the story. How to handle a case in court can be complicated and is not covered in this publication.  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 is called execution. This usually means that an officer of the law comes to the debtor’s home or work place to take things owned by the debtor. The things that are taken are sold to pay the judgment. The Texas Property Code sets out the kinds and amounts of property that can and cannot be taken to pay a judgment in Texas. Certain federal laws also say what kinds 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 may 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 plus pay any 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.

Many people do not have anything that can be taken by a creditor to pay a judgment.  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 simply admitted if they are true or denied if they are false. If you have a judgment against you and you receive post-judgment discovery, it is really important that you answer the questions.  Many people end up having 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 can be taken to pay debts. 

What is “judgment proof”?

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 the creditor can take the property back if you do not make the payments on time.

Details of property exemption rights in the Texas Property Code are provided in the Appendix in the pdf at the link above.  

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 10 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 are 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 wages, those wages that have not yet been paid, cannot 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 exempt. 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.

Benefits from life, health, or accident insurance 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 important 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 2 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 has the responsibility to protect the full amount that is exempt. Also, it does not make a difference whether there is a co-owner on the account.

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 that 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 claim to the property. In other words, it is illegal to give away property to keep from paying a debt.  It is also illegal to change who owns property with the intent to hinder, delay, defraud, or prevent a creditor from receiving the fair value of property when you are unable to 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?

For a detailed discussion of bankruptcy, you can click here for the Legal Hotline publication on 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

What property can the IRS take?

The Internal Revenue Service is not bound by state exemption laws.  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, & Trust Law Section, and the Litigation Section.

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