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Sell a Home During Bankruptcy
Unfortunately, there are certain circumstances in life which can cause severe financial distress, and you may be considering filing for bankruptcy. As a homeowner, you're probably wondering what would happen to the equity you have in your house, or perhaps you're in a situation where you have to choose between filing for bankruptcy or to have your home go into foreclosure. While neither option is ideal and both have their consequences, the FAQs below provide more information on this topic to help you make the best decision.
How can AMI Home Buyers help if you are filing for bankruptcy?
If you are planning to file for bankruptcy or have already filed, and are looking to sell your home in accordance to the Texas homestead bankruptcy exemption, we can make you a cash offer and cover all closing costs. This would allow you to sell your home quickly, so you use the sale proceeds to work on repairing your credit and/or buy a new home, while avoiding the hassles, fees, and time it can take to sell your home on the market.
FAQs Related to Selling During Bankruptcy
You’ll find a list of the frequently asked questions we receive from homeowners in general here. You'll find a list of bankruptcy specific frequently asked questions below.
Disclaimer – The information on this page is intended for general informational purposes only and not to provide legal advice.
What is bankruptcy and how is it different from foreclosure?
Bankruptcy is a legal proceeding which helps an individual who unable to pay his or her bills, get a fresh financial start. The right to file for bankruptcy is provided by federal law, and it immediately stops all of your creditors from trying to collect your debts, at least until your debts are sorted out according to the law.
Foreclosure is the legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making mortgage payments. This allows the lender to force the sale of the home through a foreclosure auction for collateral on the mortgage loan. If the property doesn’t sell at the auction, the lending bank can take possession of it.
In Texas, filing for bankruptcy can eliminate your legal obligation to pay most or all of your debts, but it can’t eliminate your mortgage. However, it can stop or delay foreclosure on your home and allow you more time to catch up on missed mortgage payments. In most cases, you will not lose your home during bankruptcy, as long as your equity in the property is fully exempt. Texas bankruptcy exemptions can be viewed here.
Will filing for bankruptcy stop a foreclosure?
In Texas, whether you file for bankruptcy under Chapter 7 or Chapter 13, a court order called the automatic stay goes into effect. This stops all attempts for creditors to collect their debts from you, including foreclosure proceedings. However, your mortgage lender can file a motion to "lift" the stay, which would allow them to go proceed in attempting to collect their debt. The court would be likely to grant this motion if it looks like you would be unable to make the payments on your home based on your financial circumstances.
What is an automatic stay?
An automatic stay is a statutory protection which stops attempts by creditors to collect debts or enforce liens during a bankruptcy case. An automatic stay is a reason many people consider turning to bankruptcy when facing foreclosure, as it can temporarily or permanently stop your mortgage lender from foreclosing on your home.
In some cases, an automatic stay is not available, or the lender can ask the court to lift it. Also, depending on whether you file for Chapter 7 or 13, would determine whether the foreclosure process stops permanently, or temporarily, giving you more time to catch up your mortgage payments.
Is there a limit to how many times you can file for bankruptcy to avoid foreclosure?
Yes, there are limits on how many times, and how often you can file for bankruptcy to avoid foreclosure. If you had one previous bankruptcy case dismissed within the past year, the automatic stay goes into effect for only 30 days after you filed. If you’ve had two or more previous bankruptcy cases dismissed within the past year, the automatic stay will not go into effect at all.
What is worse to have on your credit report - a bankruptcy or a foreclosure?
Both are damaging to your credit, but the “better of the worse” depends on a few factors. A bankruptcy will immediately lower your credit score more than a foreclosure would. Also, a foreclosure will remain on your credit report for 7 years, while bankruptcy remains for 10 years. But that doesn’t mean foreclosure is the better option. This is because it’s possible to file for bankruptcy, rebuild your credit score, and be approved for a mortgage on a new home within just a few years. On the other hand, seeing a foreclosure on your credit report would make it very difficult for lenders to approve you a mortgage down the road.
Can bankruptcy wipe out any remaining mortgage debt after a foreclosure?
Yes, bankruptcy can eliminate your obligation to pay any additional mortgage debt after your home is taken in foreclosure.
Can you keep your home if you file for bankruptcy?
If you live in the house and you are current on your mortgage payments and will continue to make the payments, then yes, you can keep your home as it is considered an exempt asset.
If you are behind on your payments and are filing a Chapter 7 bankruptcy, it is likely that the mortgage company will try and lift the protection, so that they can foreclose on your home if you do not become current on your payments.
Therefore, if you are behind on payments, it is usually better to file a Chapter 13 bankruptcy, which is a payment plan type of bankruptcy, allowing you to bring your payments current over a 5-year catch-up plan. This is usually the best option if your mortgage payments are behind.
Can you sell your house while you're filing for bankruptcy?
The state of Texas has a generous homestead exemption for homeowners who file for bankruptcy, which allows you to exempt a certain amount of equity in your home. If you choose to claim this state exemption and want to sell your home, the timing of whether you sell your home before, during or after filing for bankruptcy may be allowed, but it is based on certain factors.
Selling Home Before Filing for Bankruptcy
Whether you can or should selling your home before filing for bankruptcy would be dependent on a few factors. If you have a lot of equity in your home, it may be tempting to sell, but your proceeds from the sale can be considered being part of the bankruptcy estate.
Therefore, if you sell your home and spend your equity shortly before filing for bankruptcy, it could interfere with your bankruptcy case, getting it dismissed or at worse, having you face bankruptcy fraud charges. If you have no equity in your home, or are “underwater” on your mortgage, meaning you have negative equity, selling your home before filing for bankruptcy would leave you with a deficiency balance, and your mortgage lender can either forgive this debt or sue you for the balance owed.
Even if your lender does forgive the deficiency balance, you could still have to pay taxes on the forgiven debt. Therefore, it may be a better option to file for bankruptcy first before trying to sell your home.
Selling Home During & After Bankruptcy Filing
According to the Matter of Deberry, 5th Circuit 2018, Texans may sell their house as long they owned their home on the day they filed for bankruptcy, properly claimed their home as exempt, and there were no objections. They can also keep the sale proceeds safe from creditors, and spend the money as they like.
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