Under Texas bankruptcy exemptions, 100 percent of your home’s equity is protected from liquidation when you file for bankruptcy—as is some personal property. However, you are more likely to keep your home long-term if you file for Chapter 13 rather than Chapter 7 bankruptcy.
Chapter 13 bankruptcy, also known as a “wage earner” or reorganization plan, assumes you have a steady income to pay your debts and ongoing bills. Under the supervision of a court-appointed trustee, you will keep all your property and pay all or most of your accumulated debts over three or five years. At the end of the plan, your unsecured debts will be discharged or forgiven. Debts with secured creditors, such as mortgages and car loans, cannot be discharged.
Chapter 7 bankruptcy, commonly called a liquidation plan, requires that you have little or no income. While your home is exempt from being sold to pay creditors, Chapter 7 filers have non-exempt assets liquidated, and unsecured debts discharged. In addition, there is no provision to pay missed mortgage payments over time. So, to keep your home, you will have to come up with the money needed to bring your mortgage up to date and to make your regular monthly payments, which can be very difficult for most Chapter 7 filers.
Even with a decent salary, making your Chapter 13 plan payments, paying your mortgage, and staying on top of your bills can be challenging and stressful.
Friendlyhousebuyers offers the following five tips for a successful Chapter 13 bankruptcy.
1. Don’t Miss Any More Mortgage Payments
Bankruptcy puts an automatic stay on any foreclosure proceedings under both Chapters 13 and 7. Your Chapter 13 payment plan should resolve your back mortgage debt during the plan’s terms and keep the stay in place. However, failure to make ongoing mortgage payments could trigger foreclosure proceedings. Some homeowners consider rolling their mortgage payments into their debt repayment plan to ensure they stay current on their mortgage during the plan period. Remember you will still owe the remaining loan balance at the end of the three or five years.
2. Try to Modify Your Mortgage
Your lender may be willing to modify your mortgage terms. Typically, a lender will ask you to “reaffirm” the debt, preventing you from discharging any missed payments or penalties still owed after completing the payment plan. If your payments are lowered, you will have to report the resulting increase in your disposable income to your trustee. You may have to dedicate the additional funds to your repayment plan.
3. Consult Your Attorney Before Taking on New Debt
Call your attorney if you are thinking of changing your debt profile. During your Chapter 13 bankruptcy, you will need the court’s approval to take on any new consumer debt or leases. Most likely, the court will not look favorably on your buying a fancy new car or purchasing a second home; but some debts, such as medical expenses or critical home repairs, cannot be avoided. Likewise, you will also need permission if you want to refinance your mortgage for more flexible terms.
4. Consider Payroll Deductions, Even If Not Required
You may have no choice but to have your plan payments deducted directly from your paycheck, depending on where you live in Texas. For example, “Wage Orders” are required throughout the Southern District of Texas. In other cases, your trustee may require such a provision. However, even if it’s not mandatory, you may consider asking your employer to sign a wage order agreement. While this seems onerous, you will sleep better at night knowing your plan payments are automatically made. In addition, if you have elected to include future mortgage payments in the plan, you will rest even more peacefully.
- Consult Your Attorney With Any Changes
As mentioned above, Chapter 13 bankruptcies are for debtors who have consistent income. Contact your attorney if there are any unavoidable changes to your employment situation—such as a layoff or illness that keeps you from working. You may be able to get temporary relief from payments. If the situation is prolonged or permanent, you may need to convert your bankruptcy from Chapter 13 to Chapter 7.
You should also call your attorney immediately if you decide you want to sell your home during your plan period. Your attorney will have to negotiate terms with your trustee, and there is some complicated paperwork to be completed.