Can I keep my house through bankruptcy?
An overriding concern for many contemplating bankruptcy is whether they will
lose their house in the process. What happens to a house is a function of
several issues, but, in general, if the equity in the house is exempt and
you can keep making the payments, you can keep the house. In Texas, the
equity in your home is exempt.
Secured debt survives
The bankruptcy discharge eliminates your personal liability for the mortgage,
but it does not disturb the lien. Thus, after bankruptcy, the
mortgage lender still has its rights in the property, including the right to
foreclose if you breach the loan agreement.
But, just filing bankruptcy is not a breach of the agreement; failing
to make the payments according to the loan agreement is a breach.
So, make the payments, keep the house.
If you are behind on your payments and it makes sense to keep the
Chapter 13 is about saving the home.
A different question is whether it is a good idea to keep the house,
if it is fully encumbered ( that is, the debt on the house is equal to
or greater than the value of the house).
Sometimes, debtors have taken out home equity loans such that all of
the value in the property is pledged to lenders. Or, the cost of
paying the mortgages is greater than the cost of renting
Part of getting a fresh start may be walking away from property that
is a greater burden than an asset.
In Texas your homestead exemption is based upon lot
size - one acre if urban. It may be of unlimited value. However, if you are
behind on your mortgage payments and are subject to foreclosure, understand that
a Chapter 7 Bankruptcy will only delay foreclosure. If you want to keep the
home, you will have to make up the past due payments with your creditor, or ask
them to "tack" the past due payments on the end of the note. If
you are current on your mortgage payments, you will have to make your payments
before, during, and after the bankruptcy.
Bankruptcy won't eliminate most liens on your home -
your home is security for the loan. If you pledged your home as security for
loans other than your mortgage - home equity or second mortgage - or a creditor
such as the IRS has recorded a lien, those creditors , too, have claims against
your home. These types of claims are called "liens." Most lien holders
have a right to foreclose if the lien isn't paid off within a specified time.
Behind on Mortgage Payments
If you are behind on your mortgage payments and
looking for a solution, your first strategy should be to negotiate with the
lender. Most lenders are willing to negotiate. What the lender agrees to will
depend upon your credit history, the reason for your missed payments and your
financial prospects. For example, you miss a few house payments because you had
a car accident and couldn't work for two months. It looks like you will get back
to work soon. In this case the mortgage company will most likely make a deal
with you rather than move for foreclosure. Possible options with the lender
Spread out the repayment of the missed payments over
a few months.
Reduce or suspend your regular payments for a
specified time and then add a portion of your overdue amount to your regular
payments later on.
Extend the length of your loan and add the missed
payments at the end.
Suspend the principal portion of your monthly
payment for a while and have you pay only interest, taxes and insurance.
Refinance your loan to reduce future monthly
Let you sell the property for less than you owe the
lender and waive the rest. This is caled a "short sale."
If the Lender Starts to Foreclose
If your debt problems look severe or long-lasting,
the lender may take steps toward foreclosure. If you are faced with foreclosure
and want to keep your home, contact us immediately.
In most cases, before foreclosure actually occurs
the lender will "accelerate" the debt or "call the loan."
This means that you have to pay the entire balance immediately. If you don't the
lender will foreclose. Foreclosure usually takes about 90 to 120 days. During
this time, you have several options:
Sell your home. Again if you do not get any offers,
a short sale may be possible.
Get another lender to give you a loan that pays off
all or part of the first loan and puts you on a new schedule of monthly
payments. If the original lender has accelerated the loan, you will need to
refinance the entire balance of the loan. If the original lender has not
accelerated, then you need only finance those payments that you missed.
File for Chapter 13 Bankruptcy. Chapter 13 will
allow you to cure the default - make up missed payments - and make regular
If Foreclosure is Unavoidable
If you cannot negotiate your way out, or the options
described above are unavoidable, the bankruptcy will often be a better deal than
foreclosure. In bankruptcy, the trustee supervises the sale of your home. They
will attempt to maximize the selling price. Secondly, debtors rarely recover the
balance of sale proceeds in a foreclosure. In a bankruptcy, you are entitled to
your cash homestead, if there are proceeds left over after the secured creditors
have been paid off.