Many debtors facing foreclosure consider bankruptcy, especially as the foreclosure seems imminent. But when does a foreclosure warrant a bankruptcy filing? First of all let’s talk about how foreclosure works in Texas. In Texas, the bank can choose whether they want to use the judicial foreclosure process or the non-judicial foreclosure process. If they use the judicial foreclosure process, they will need to sue the homeowner to get the right to auction the home off. This usually happens if there is no “power of sale” in the mortgage agreement or deed of trust.
If there is a power of sale, the bank will use what is called a non-judicial foreclosure which will allow the lender to auction the home off without suing the homeowner. In either case if the debtor wants to save their home foreclosure, they will probably need to file bankruptcy to do so, unless they have the cash to catch up on mortgage payments. If the homeowner doesn’t want to keep the home but believes that they may owe money on a second or third mortgage, they may want to file bankruptcy so that they can discharge the unsecured mortgages.
The second and third mortgages and other liens will be classified as unsecured by the bankruptcy court if they exceed the value of the property after the primary mortgage has been paid. It is also important to consider whether you will qualify for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy . For debtors who don’t want to keep their home and only want to discharge junior liens on the property, a Chapter 7 bankruptcy filing would be ideal. In contrast, saving your home from foreclosure may be best done with a Chapter 13 bankruptcy so that you can catch up of on delinquent payments over time.