If you have fallen behind on your mortgage payments, you’re likely worried about protecting your home. But how can bankruptcy help? Is it possible for you to save your house? Below, we discuss how to stop foreclosure actions through bankruptcy and buy yourself a little time.
How the Foreclosure Process Works
Once your mortgage goes into default, your lender will initiate a foreclosure. How the foreclosure will proceed depends on the language of your mortgage contract. Essentially, the lender will take possession of your home and then sell it at auction. The money from the auction will be put toward legal costs and the deficiency balance, which is what the lender expected to receive minus what they received at auction. In Texas, lenders are allowed to pursue deficiency balances on mortgages.
Delaying Foreclosure With the Automatic Stay
As soon as you file for any kind of bankruptcy, you are entitled to the automatic stay, which protects you from any creditor actions. This means your creditors must cease any collection actions against you, including foreclosure. Typically, this will buy you three to four months of time and offer you some breathing room while you figure out your next steps.
However, your creditor can petition the court to lift the automatic stay in cases where it’s apparent that you have no intention or ability to continue paying on the loan. How much time the automatic stay will buy depends entirely on the type of bankruptcy you’re pursuing and whether saving your home by paying the arrearage and continuing to make payments is economically possible.
How Can Chapter 7 Bankruptcy Help?
Chapter 7 is designed to discharge unsecured debts by liquidating whatever assets you cannot protect under the law. In most cases, however, Chapter 7 bankruptcy isn’t the best option for saving your home from foreclosure completely, since it isn’t designed to handle secured debt, like a mortgage. But in Texas, certain assets can be exempted from bankruptcy liquidation and equity on your home is one of those (with one exception to this rule related to the amount of acreage on your property).
While you can protect your home equity from liquidation and temporarily stop foreclosure, you’re still required to continue making payments on the home. If this is beyond your means, you will lose your home. You will be required to pay both the arrearage and continue to pay your monthly mortgage payments.
However, through the automatic stay, you may be able to use the extra time to your advantage. For example, you can work out a loan modification or short sale with your lender.
How Can Chapter 13 Bankruptcy Help to Stop Foreclosure?
Chapter 13 bankruptcies work entirely differently. Instead of discharging debt, Chapter 13 allows you to reorganize your debts into a payment plan. As a result, you get to keep your property.
In terms of stopping foreclosure, you will have to repay the arrearage plus the monthly payments if you want to keep your home. But you won’t have to pay the arrearage all at once. You can prorate the amount owed over three or five years.
Keep in mind, however, that foreclosure proceedings may continue if there is a lack of payment on homeowner’s association fees or property taxes. In that case, the outstanding debt can be repaid over the life of the bankruptcy. But you would have to remain current on any future property and HOA fees.
Second Mortgages and HELOC Loans
If you have taken out lines of credit against the equity on your home, you still have options in bankruptcy. If you are still paying off a primary mortgage, the courts can recategorize a second or third mortgage as an unsecured debt.
In Chapter 13, unsecured debts are the lowest priority. That means that in the hierarchy of repayment, they come last. In some cases, the second mortgage can be stripped off entirely. In other cases, you will be required to pay some (but not all) of the second mortgage.
Federal vs. State of Texas Homestead Exemptions
In Texas, you are allowed to choose between federal and state laws regarding Chapter 7 exemptions. You cannot, however, mix and match.
Texas law offers more total asset protection in terms of dollars and cents and allows you to protect an unlimited amount of equity. But there are restrictions on protecting homestead property. If your property is in an urban area, it cannot be more than 10 acres. In a rural area, you are limited to 100 acres or 200 acres if it is occupied by a family.
The federal homestead exemption allows you to protect around $25,000 in home equity which is doubled for a married couple filing together. Which one is right for you will depend on your needs, your situation, and whether or not you want to keep your home.
Talk to a Dallas TX Bankruptcy Attorney Today
At Allmand Law Firm PLLC, we know how stressful it can be when your home is in danger. But Texas has some of the most debtor-friendly bankruptcy laws in the U.S. To learn more about how to stop foreclosure actions through bankruptcy, contact us today.