What is a Proof of Claimin a Texas Bankruptcy?

A “proof of claim” is an official form filed by creditors in a bankruptcy case that helps the trustee determine what debts are owed and how much to pay each creditor if there are assets available for liquidation or a payment plan.

  

Filing a proof of claim does not guarantee that you will be paid!  For example, in a chapter 7 bankruptcy case, creditors are paid only if there are non-exempt assets available for the trustee to liquidate.  In many cases there are no assets.  In cases with assets, their liquidation usually does not yield enough to pay creditors in full, but creditors may receive a partial payment.

Typically, when a bankruptcy case is filed, the trustee will provide notice to creditors that the bankruptcy case has been filed, and the notice will specify the date (the “bar date”) by which a proof of claim must be filed.  An example of this notice can be found at the following link: http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK_Forms_Current/B_009I.pdf.  Failure to file a proof of claim on time may “bar” a creditor's claim.

In the proof of claim, the creditor must set forth specific information such as its correct name and address, the amount of the debt as of the date on which the bankruptcy case was filed, and whether the claim is secured or unsecured.  Creditors should also attach copies of the documents that evidence the claim such as a promissory note, security agreement, UCC-1 financing statement, guaranty, or deed of trust.

A form proof of claim may be found at: http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK_Forms_Current/B_010.pdf, however, some local courts have their own versions of this form.

Some larger companies with collections departments and bankruptcy specialists will file their own proof of claim.  However, if you are unfamiliar with the bankruptcy process and deadlines, the best practice is to hire an attorney to assist you in navigating through the bankruptcy case.

Article by Sarah F. Berry, Attorney

How to Determine the Texas Debtor’s Homestead: Involuntary Designation

What does a creditor do when the debtor or his/her spouse owns more than one piece of property but has never made a voluntary homestead designation using the methods described in section 41.005 of the Texas Property Code? Or when the debtor has designated more than one piece of property as his/her homestead, and it is unclear which property constitutes the homestead entitled to constitutional protection from most types of debt?

Subchapter B of Chapter 41 of the Texas Property Code describes the method by which a judgment creditor seeking execution of a writ on certain real property can force the debtor to make an election for purposes of designating the exempt homestead. See Tex. Prop. Code § 41.021 et seq. First, the creditor must send a notice to the debtor containing the proper statutory language. If the debtor fails to respond, the judgment creditor must then file a motion with the court that issued the writ of execution, requesting that the court appoint a commissioner to determine the judgment debtor’s homestead. See id. at § 41.023. After appointment, the commissioner will submit a report concerning his/her designation, which shall be confirmed, rejected or modified by the court, as deemed appropriate. Id.

The reasonable costs and fees associated with this involuntary designation process “shall be” taxed against the judgment creditor as part of the costs of execution. Id.

Article by Cynthia Veidt, Attorney

How to Determine the Debtor’s Homestead: Finding a Voluntary Designation

As most creditor’s discover, Texas homestead laws can be, well, complicated. The basic rule is sound: a debtor and his/her family can have only one Texas homestead. But when the debtor owns more than one piece of real property, or the debtor and his/her spouse own multiple pieces of real property, how can the creditor determine which property is the homestead under Texas law?

There are always a few exceptions, but in general, section 41.005 of the Texas Property Code governs the debtor’s voluntary homestead designation.  Essentially, the debtor must file a signed designation, acknowledged in the manner required for recording instruments, in the real property or official records of the Texas county in which all or part of the property is located. The designation must contain certain information, particularly a description sufficient to identify the property designated as homestead.  See Tex. Prop. Code § 41.005(c). It is always advisable for a creditor to check the official records held by the County Clerk’s office to determine whether any instrument filed in that county meets the statutory criteria for designation of the debtor’s homestead. 

Alternatively, the debtor may file an application for homestead exemption with the appraisal district for the county in Texas in which the property is located. See Tex. Prop. Code § 41.005(e). However, where the debtor has designated one property using this method and has also designated another property as his homestead by filing that instrument in the county clerk’s official records, the designation filed in the Texas official real property records will prevail over the debtor’s application for tax exemption. See Tex. Prop. Code § 41.005(e).

Article by Cynthia Veidt, Austin Attorney

Debtors, Taxes and Bankruptcy

If you're a creditor and you wondered how taxes are handled in a bankruptcy, there is a good article on taxes and debtors in bankruptcy in the Texas Lawyer.  The link is here: http://www.law.com/jsp/tx/PubArticleTX.jsp?id=1202542728986&rss=tx&slreturn=1

Fifth Circuit Case Deals with Question of Bank Account owner

An interesting case coming out of the Fifth Circuit in January of 2012, Stettner v. Smith, seems to hold that a court, applying Texas law, can decide that whether or not something is property (here a bank account) of a company is decided by control of the property or funds and not the entity name on the bank account.  Worth a read.

Collecting Judgments in Texas: Is it Easy or Difficult?

The answer is: difficult.

Many times I get asked, "I have this Texas judgment. So now what?"

Well, that is precisely the issue in Texas. Many collections lawyers will not talk about the collectability of a judgment before taking your retainer and starting the collections process. This may not be a big issue in some other states, but in Texas you really do have to know the difficulties our fine (cough) legislature has made collections in this state.

The only state in which I've worked with local counsel that has it harder than Texas lawyers in collections was the time I worked with a Florida lawyer on a domesticated Texas judgment. In Florida, as I understand it, you could (at that time, a few years ago) convert non-exempt assets into exempt assets so long as you transferred it to your homestead. Basically, if you prepay your mortgage with the money you owed someone else, that was protected. At least in Texas we consider that a fraudulent transfer.

So how is it otherwise difficult to collect a Texas judgment? Well, there are many procedural reasons why it is difficult to collect a judgment in Texas, too many to fully mention, but I'll try to give you a flavor.

First of all, Texas is one of the two most debtor friendly states in the union, particularly when it comes to exempt property. Texas in some cases has unlimited values in its exempt property, largely unheard of in other states.

Also, Texas requires fraudulent transfer actions as a separate lawsuit, and not as an ancillary proceeding in post judgment. This basically means that if the debtor moves his or her property to an insider, largely you have to sue and serve the debtor and the debtors transferee in a whole new lawsuit. That is always fun.

One of the most commonly referenced limitation in Texas law for collection against individuals is the infamous garnishment law in Texas. First, unless it is child support, you can't garnish wages. So in other states where you just notify the employer that you'd like certain moneys to be directed to you as creditor, in Texas this is actually illegal. Furthermore, in non-wage situations the garnishee is usually a bank...and guess what? Bank lobbies in Texas were apparently at one time (I'm guessing before 2008) pretty strong. Banks apparently got tired of having to incur legal expenses to answer for debtors that either currently or recently had bank accounts, so now the creditor, who is largely already out money due to the actions of the judgment debtor, may end up having to pay for the legal fees of the bank if they go wildcatting and drill a dry hole. So congratulations, you get to risk even more money than paying your lawyer, Ms. Creditor...you also may have to pay the bank lawyer's fees too. Oh, and there's almost no way, other than asking the debtor for statements (which they always gladly give, right?), to find out in advance what money is in the account due to privacy laws.

Oh, and if there is money in the bank account? Yeah, it might end up all going to the bank anyway, since their right of offset against their own loans gives them the opportunity to pay themselves first once you notify them that their debtor is in trouble.

Another challenge is in business entities. The legislative creation of Limited Liability Companies and other "partnership corporations" add a very real layer of complications to the judgment creditor. Texas law has not done a very good job of making single member LLC's veil piercable, in fact making it one of the most challenging things to do. Furthermore, often collection is restricted to "charging orders", which is really not much of an order at all. Basically, charging orders give you no power of control over the limited liability company assets...so no voting, no control...merely a right to be paid if and when there is a decision by the LLC to do a distribution. So, by all means, hold your breath for that to happen.

So what is a good creditor to do? Well, know these are limitations and factor them into your business practices. If you're doing business with a subsidiary or a single member LLC, get a corporate parent or personal guaranty or consider adding explicit collateral and securitize the loan. Also, think about collection rates when you consider the cost of doing business in Texas.

And finally...don't hire just any litigation lawyer to do your collection. Hire someone experienced and familiar with these laws so that you do not throw good money after bad.

How is a Promissory Note Different from a Forbearance Agreement?

Under Texas law, a promissory note “is a written unconditional promise to pay another a certain sum of money at a certain time.” (Edlund v. Bounds, 842 S.W.2d 719, 724 (Tex.App. —Dallas 1992, no writ). The time need not be a specific date, but it must be a time that will certainly arrive. For instance, a note payable on demand or “on or before” a specified date may constitute a promissory note. A promissory note is also a contract subject to the rules applicable to interpreting contracts. DeClaire v. G & B Mcintosh Family Ltd. P’ship., 260 S.W.3d 34, 44 (Tex.App.—Houston [1 Dist.] 2008, no pet.).

The difference between a promissory note and a forbearance agreement is that a forbearance agreement is an agreement not to enforce rights you already have.

A forbearance agreement is an agreement typically between a creditor and a debtor whereby the creditor agrees to forgo some legal right in return for concessions from a debtor who is in default. Swilley v. City Inv. Co., 288 S.W. 485, 486 (Tex.Civ.App.—Galveston 1926, writ ref’d) (explaining that forbearance of a legal right is sufficient consideration for a promise of guaranty). A forbearance agreement is a powerful tool for creditors who face debtors in or near default on their obligations, and often should be used in lieu of entering into a promissory note.

In a typical forbearance agreement, a creditor will agree not to sue on a balance due in exchange for certain concessions by the debtor, such as an increased interest rate, as well as various admissions that can prove invaluable to a creditor should the debtor fail to fulfill the terms of the agreement.

It may also contain the remaining balance on the indebtedness, and an admission that the debtor is in default. A creditor might also receive an increased interest rate and a waiver of various notice requirements in the event of a future default. The agreement typically will also contain a provision that allows the creditor to reassert the rights that have been forgone under the agreement should the borrower fail to make a payment, or fail to fulfill any obligation of the agreement by a certain date. If this occurs, the debtor’s signed admissions concerning the original note could prove invaluable in a lawsuit.

Prepared by Chris Patterson. Reviewed and revised by Marc L. Lippincott.