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Can I Apply the Texas Two-Step to My Bankruptcy?

No. Before we get into the Texas two-step, it is important to understand that major corporations have all the benefits of being a “person,” but unfortunately, they incur few of the responsibilities. The Texas two-step is a method for major companies to deal with lawsuits resulting from major class-action lawsuits or “nuclear verdicts.” The process allows a company to segment itself into two companies. One of those companies is just your typical company, while the second company has all of the first company’s liabilities transferred to it. In other words, the company that got sued no longer “owns” the debt. It belongs to a second company. The second company files for bankruptcy.

It becomes difficult for the plaintiffs to leverage the second company into paying the settlement, and they can forestall repayment while a bankruptcy trustee decides how much this second company must repay. Obviously, it hurts plaintiffs and allows companies to shirk responsibility for harming the public. That is precisely why you, as an individual, are not allowed to do it. 

Below, we will take a look at what the Texas two-step would look like if it were pulled off by an individual and not a company.

The Texas Two-Step

Hi. My name is John Doe. I caused a car accident while driving drunk and was sued by the injured party. I now owe them $150,000 for medical expenses and pain and suffering beyond what my insurance would cover. Since I cannot afford to pay, I will have to declare bankruptcy. But I am not allowed to discharge the debt because of a state law that prevents me from doing so if I cause an injury while I am intoxicated. 

Instead of paying the debt, I create a new identity. Let’s call him Josh Doe. I transfer the debt to Josh Doe and declare bankruptcy on the debt. I will still have to pay it, but my creditor will not be able to sue me, garnish my wages, or place a lien on my property. In other words, the creditor no longer has the ability to pressure me into repayment because I am in bankruptcy. I have no incentive to timely repay the debt because I am Josh Doe whenever you want your money, and John Doe can go about his business. 

Obviously, if an individual were able to transfer their debt to a shell identity, it would make a mockery of the credit system, and this is largely why the Texas two-step is being discussed in legal circles right now. It affords corporations the right to create shell identities that take on the liability of a parent corporation. It also separates the assets of the company from its debts. In other words, it is ripe for abuse, and the debtor companies have little incentive to come to the table to negotiate. Plaintiffs don’t see their money even after they’ve won their suits. 

But no, they do not let John Doe get away with that. 

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