Filing for bankruptcy can be a significant and complex decision, impacting various aspects of your financial life, including your home. Many people wonder if they could lose their house when they contemplate filing for bankruptcy. As an attorney specializing in bankruptcy law at Warren & Migliaccio, L.L.P., I understand the critical importance of navigating these waters carefully.
This blog provides an in-depth analysis of how bankruptcy might affect home ownership, particularly under Chapter 7 bankruptcy, which is often a concern for many individuals considering this route. Read on to learn how to best protect your assets before filing for any kind of bankruptcy.
Understanding Chapter 7 vs. Chapter 13 Bankruptcy in Texas
Before diving into how Chapter 7 bankruptcy can impact your home, it’s important to understand the key differences between Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy, often called “liquidation bankruptcy,” involves the sale of non-exempt assets to repay creditors. Individuals with significant unsecured debt and few assets typically choose this type of bankruptcy. Chapter 7 can discharge most unsecured debts, but the bankruptcy trustee may sell non-exempt property to pay your creditors.
Chapter 13 Bankruptcy, on the other hand, is known as a “reorganization bankruptcy.” This allows you to keep your assets, including your home, by setting up a 3 to 5-year repayment plan. Chapter 13 is generally more favorable for individuals with a steady income who are behind on mortgage payments but wish to keep their property.
In Texas, Chapter 7 and Chapter 13 bankruptcies operate under federal law, but state exemptions play a crucial role in determining what assets you can keep. Texas protects your home so it won’t be sold in Chapter 7 bankruptcy through its generous homestead exemption, but conditions apply.
Could You Lose Your House in Chapter 7 Bankruptcy?
The possibility of losing your home in a Chapter 7 bankruptcy depends on several factors:
- Homestead Exemption: Texas has one of the most protective homestead exemptions in the country. Under this exemption, your primary residence is generally protected from creditors and cannot be sold to satisfy debts, as long as it is within certain acreage limits (10 acres in a city, town, or village, or 100 acres in the countryside, or 200 acres for a family). However, this protection is not absolute. If you have substantial equity in your home that exceeds the allowable exemption, a bankruptcy trustee might seek to sell the property to pay off your debts. For instance, if your home is valued at $300,000 and you owe $100,000 on your mortgage, you have $200,000 in equity. If this equity exceeds the Texas homestead exemption limit, you could be at risk of losing your home.
- Liens on Your Property: Creditors may place liens on your home for debts that you owe. If a creditor has a valid lien on your property, the lien will generally survive the bankruptcy discharge, meaning the creditor could potentially foreclose on your home after the bankruptcy case is closed. However, there are strategies to avoid or remove liens, such as filing a motion to avoid the lien if it impairs your homestead exemption.
- Mortgage Payments: If you are behind on your mortgage payments, Chapter 7 may not offer the best protection for your home. Unlike Chapter 13, which allows you to catch up on missed payments through a repayment plan, Chapter 7 does not provide a way to cure defaults on secured debts like mortgages. If you are delinquent on your mortgage, the lender could continue with foreclosure proceedings even after you file for bankruptcy.
Strategies to Keep Your House Safe During Bankruptcy
While filing for Chapter 7 bankruptcy in Texas carries risks to your home, there are several strategies you can employ to protect your property:
- Use the Homestead Exemption: Ensure that your home falls within the Texas homestead exemption limits. This is your first line of defense in not losing your house. If your equity is within the exemption limit, your home is generally safe from being sold in a Chapter 7 bankruptcy.
- Avoid or Remove Liens: If creditors have placed liens on your home, it may be possible to avoid these liens through bankruptcy. Texas law and bankruptcy rules provide avenues to challenge or remove certain liens, particularly if they impair your homestead exemption.
- Reaffirmation Agreements: In some cases, you can enter into a reaffirmation agreement with your mortgage lender. This agreement essentially reaffirms your commitment to continue making payments on your mortgage, despite your bankruptcy filing. While this can keep you in your home, it also means you’ll remain liable for the mortgage debt.
- Convert to Chapter 13: If you’re at risk of losing your home in Chapter 7, consider converting your case to a Chapter 13 bankruptcy. Chapter 13 provides more robust protection for homeowners, allowing you to catch up on missed mortgage payments and keep your home through a court-approved repayment plan.
- Seek Legal Counsel: Navigating the complexities of bankruptcy law is challenging, and the stakes are high when it comes to protecting your home. Working with an experienced bankruptcy attorney can help you develop a strategy tailored to your specific situation. At Warren & Migliaccio, L.L.P., we can guide you through the process, helping you understand your options and the best course of action to safeguard your property.
What to Do If Creditors Put Liens on Your House
If creditors have already placed liens on your home, don’t panic. This does not mean you have lost your house, yet. While these liens can complicate the bankruptcy process, they do not automatically mean you’ll lose your house. The key is to act quickly and decisively:
- File a Motion to Avoid the Lien: If the lien impairs your homestead exemption, you may be able to file a motion with the bankruptcy court to have it removed. This is a powerful tool that can eliminate the threat of foreclosure and protect your equity in the home.
- Negotiate with Creditors: In some cases, it may be possible to negotiate with creditors to reduce or eliminate the lien. Creditors are often willing to settle for less than the full amount owed, especially if they believe the lien may be challenged or removed in bankruptcy.
Home Ownership Goals During Chapter 7 Bankruptcy
Chapter 7 bankruptcy is designed to provide a fresh start by discharging unsecured debts, but it requires the liquidation of non-exempt assets to repay creditors. For homeowners, this raises the concern of whether their property will be at risk. The primary goal during Chapter 7 is to ensure that the bankruptcy process does not result in the loss of essential assets, including your home, provided specific conditions are met.
Home Ownership and the Chapter 7 Bankruptcy Trustee
In Chapter 7 bankruptcy, a trustee oversees asset liquidation if the process progresses far enough. The trustee assesses whether any non-exempt assets will need to sell to satisfy creditors. Regarding your home, the trustee will evaluate the equity you have in the property. If the equity exceeds the exemption limits established by Texas law, the trustee may decide to sell the property to repay creditors. It’s always best to not let the process get to this point.
Continue Paying The Mortgage
When filing for Chapter 7 bankruptcy, it is essential to understand your obligations to your mortgage lender. Bankruptcy does not eliminate the mortgage debt; instead, it addresses unsecured debts. Therefore, you must continue to make timely mortgage payments to avoid foreclosure. The bankruptcy court will not interfere with your mortgage agreement, and your lender retains the right to enforce the terms of the loan.
If House Payments Are Current in Chapter 7 Bankruptcy
If you are current on your mortgage payments, you are generally in a better position to retain your home during Chapter 7 bankruptcy. The bankruptcy process will not affect your mortgage payments or your lender’s right to collect them. Maintaining your payments throughout the bankruptcy process is crucial to preventing any potential foreclosure actions.
What Happens When You’re Behind on House Payments During Chapter 7 Bankruptcy
If you fall behind on mortgage payments during Chapter 7 bankruptcy, the situation becomes more complex. While Chapter 7 bankruptcy can provide relief from unsecured debts, it does not directly address mortgage arrears. If you are behind on payments, the lender may initiate foreclosure proceedings. In such cases, it is advisable to seek legal guidance to explore options such as negotiating a repayment plan or filing for Chapter 13 bankruptcy, which might offer more flexibility for catching up on missed payments.
What Happens If You File?
When you file for bankruptcy, the lender may request the court to lift the automatic stay, which would allow them to proceed with foreclosure actions. If the bankruptcy trustee does not intend to sell the home, the court is likely to grant this request. Alternatively, the lender can opt to wait until the bankruptcy case concludes, at which point they may move forward with foreclosure and ultimately sell the property at auction.
Why Chapter 7 Won’t Resolve a Default
Chapter 7 bankruptcy does not provide a mechanism for addressing overdue payments through a repayment plan. Chapter 7 also does not eliminate the lien allowing the lender to repossess the property if you miss payments. Once the automatic stay lifts, the lender can proceed with foreclosure, a common way to lose your house.
Too Much Equity or Need Time to Address Arrearages? Consider Chapter 13
Chapter 13 bankruptcy offers a structured repayment plan that enables you to address overdue mortgage payments gradually, helping to prevent foreclosure. Additionally, this plan allows you to manage and pay off the value of any nonexempt equity you cannot protect under the homestead exemption, thereby securing your home and satisfying creditor claims.
Navigating bankruptcy while retaining home ownership requires a comprehensive understanding of both bankruptcy laws and mortgage obligations. Chapter 7 bankruptcy provides a valuable opportunity to eliminate unsecured debts, but its impact on home ownership is contingent upon the amount of equity in your property, the application of Texas exemptions, and your ongoing mortgage payment status.
Call A Bankruptcy Law Firm Today
Filing for Chapter 7 bankruptcy in Texas doesn’t have to mean losing your house. With the right strategies and legal guidance, you can protect your most valuable asset and move forward with a fresh financial start. At Warren & Migliaccio, L.L.P., we’ve helped thousands of clients navigate the complexities of bankruptcy and safeguard their homes.
For a free consultation to discuss your options and find out how we can help you, call us at (888) 584-9614 or fill out our online contact form. We’ll work with you to develop a plan that fits your situation and helps you keep your home while dealing with your debts.
