Do you find yourself in a situation where you are considering filing for Chapter 7 bankruptcy? This option can provide some debt relief in times of financial instability and you are not alone in considering this path. However, one of the most common concerns of homeowners is “What will happen to my home if I file bankruptcy, and will I be able to sell it afterward?”
In this article, we will go over the process for Chapters 7 filings and explain why it is one of the most commonly utilized by bankruptcy filers. We will also cover useful information about bankruptcy laws in the state of Texas, what are the necessary steps to ensure you keep ownership of your home, and what are your sale options once the process is complete.
How To Sell A House After Filing Chapter 7 Bankruptcy In Texas
What is Chapter 7 Bankruptcy?
Chapter 7, also known as “liquidation” or “straight bankruptcy”, is the most commonly used legal proceeding by individuals in the United States as it can “discharge” most or all of your outstanding debt. In other words, if the court officially discharges your bankruptcy, you will no longer be legally obliged to pay back your creditors. Keep in mind, that there are however exclusions, and some debts – such as student loans, child support, some taxes, criminal fines, and others, will not be discharged. Unlike chapter 13, chapter 7 bankruptcy cases do not involve the filing of a repayment plan.
Even though filing for liquidation might seem like a good option for a “fresh start”, going through with the process requires expertise and it is always a good idea to consult an experienced bankruptcy attorney for legal advice. Before beginning the process the attorney can help you analyze your debt, calculate your asset’s equity, and homestead exemption, and altogether evaluate the best course of action for you.
Another thing you need to carefully consider before filing for bankruptcy is the negative impact it will have on your credit score. Note that the better your credit score, the more points you will lose should you choose the option to liquidate. And, since paying your debt regularly is the only way you can improve your credit score, eliminating the debt will harm your overall score. Future creditors and financial institutions will view you as a higher credit risk because you were unable to repay your previous debts. A Chapter 7 bankruptcy will be reported in your credit history for up to 10 years and recovering your credit can take some time and effort.
Taking this into account, if you file for a Chapter 7 bankruptcy, an “automatic stay” will be put in place which will immediately, yet temporarily, stop any creditors, collections agencies, government entities, and individuals from taking collection efforts against you. The court will then appoint a bankruptcy trustee to represent the interest of your creditors. It will be the trustee’s responsibility to determine whether you have enough valuable assets, including any real estate, that could be sold to cover your debt. They have the right to seize and liquidate any assets which have not been declared as exempt.
In order to keep possession of your house, during (and after) the bankruptcy process, especially if you wish to sell it after the official discharge, you need to make yourself familiar with the specific bankruptcy state laws.
Bankruptcy Laws In Texas
In Texas, before filing for bankruptcy you are required to complete a credit counseling course, online or over the phone, provided by one of the approved counselors for the district. The next step would be taking a “means test” which takes into account your household income, comparing it to the median household income of the same size in the state. What’s more, the test’s goal is to establish whether your income is enough to cover your living expenses. To qualify for Chapter 7, your earnings should not be enough to also fund a repayment plan (which will make you eligible for a Chapter 13 bankruptcy instead).
After you pass the means test, you will need to fill the necessary bankruptcy paperwork. Although most of the forms for bankruptcy in Texas are the same as elsewhere in the country, there are some Texas district-specific bankruptcy forms and requirements that you will need to familiarize yourself with.
The following step in the process would be to present your exemption claim to the bankruptcy trustee at the Section 341 creditors meeting – a short proceeding, called by the court, usually about a month after you have filed for Chapter 7. The object of this meeting is to determine if your assets have enough equity to sell or not. Exemptions allow you to keep some or all of your property, without having to pay for it. In Texas, you can choose between the state bankruptcy exemptions or the federal ones. Although Texas is considered to have some of the most generous exemptions in the country, for some cases, such as lawsuit proceeds, it might be advisable to use the exemptions provided by the federal bankruptcy scheme.
When it comes to your house, while some details vary depending on state vs. federal laws, most homestead exemptions depend on the value of your home and how long you have been living there. To apply for a homestead exemption you must file the necessary document with the county clerk so you can claim it.
If the value of your house does not exceed your homestead exemption, your mortgage loan, the sale cost, and the trustee’s commission, the trustee will approve your exemption and not order to liquidate your assets. In other terms, they will determine that the equity of your property is not enough to repay your debts and you will be able to keep it, together with any other exemptions you have claimed.
How Long Does It Take To Sell A House After Chapter 7 Bankruptcy
A “No Distribution Report” issued by the bankruptcy trustee essentially discharges your case. However, a Chapter 7 case is officially closed once the court has issued a bankruptcy discharge, after which you can once again be considered the legal owner of your real estate. In total, the process between the initial credit counseling and the bankruptcy discharge lasts between four and six months, though it could take longer if the trustee demands additional documentation.
As far as selling your house is concerned, it is in your best interest to wait for the case to be closed because then the bankruptcy trustee has no legal claim over any of the proceeds from the sale. Instead, If you chose to sell your home immediately after your discharge but before the closure of the case, you are required to reinvest the money back into the purchase of a new home within six months of the sale, or the bankruptcy trustee can claim those proceeds and distribute them to your creditors.
In the case when the bankruptcy is complete and you still own your home, keep in mind that you will still be responsible for any expenses related to the property that come due after the filing of the bankruptcy petition. If monthly mortgage payments are still due, and the lender decides that you will not be able to make them, they may initiate foreclosure proceedings – attempt to sell the house. However, for many lenders, this process is too costly and they fail to carry it through. For you, this presents an opportunity to instead try and sell the property yourself, regardless of the status of your mortgage.
If you find a potential buyer, there are two possible options for the sale – either the buyer is prepared to pay a sum that would cover the mortgage balance, or not. In the first case, the funds from the property sale would eliminate all remaining debt you might still have after the bankruptcy. It is not impossible to even make a small profit if you hold equity in the home. In the second case, when the buyer is not willing to pay enough to cover the remaining mortgage balance, you still have the option to negotiate with your mortgage lender regarding a “short sale” of the property, essentially selling the property for less than what is owed. Since you have received a Chapter 7 discharge, the lender can provide you with a short sale incentive payment for their cooperation in selling the property.
Final Thoughts
Filing Chapter 7 bankruptcy is a hard but viable choice that can give homeowners a “fresh start” and much-needed debt relief. As the process can be difficult and complex, it is best to seek the advice of a bankruptcy attorney and discuss with them if this is indeed the best option in your situation and how you can protect your real estate throughout the process. If the property can be exempt and once the process is complete you can legally sell your house. Always keep yourself informed of the latest state and federal regulations regarding the necessary procedures.
Another common reason why people file bankruptcy is foreclosure. If you are looking to surrender your home and give up responsibility for the debt, then file a Chapter 7. However, many debtors want to keep their home despite facing foreclosure. Chapter 13 is the more effective way to keep your home. In fact, money owed to the mortgage company in arrears can be paid back to the mortgage company. Chapter 13 and its duration make this a much better choice.