If you are considering bankruptcy, you might be wondering what will happen to your home. While bankruptcy will allow you to discharge, or eliminate, most debts, your home mortgage is a loan that is secured by the equity you have in your home. In other words, the lender uses your home as collateral for the loan. If you fall behind on your payments or otherwise default on the loan, the lender can foreclose on your home. To avoid this, you may choose to file for Chapter 13 bankruptcy, which can actually help you pay off your mortgage over time, rather than having it forgiven. However, if you have a second mortgage or another junior loan on your home, such as a home equity line of credit, you may be unsure about how these loans will be treated during the bankruptcy process. In some cases, you may be able to use a process known as "lien stripping" to discharge these debts, which may reduce the total amount you will be required to repay.

Chapter 13 and Junior Loans

Under Chapter 13 bankruptcy, also known as reorganization bankruptcy, debtors are required to repay some of their debts over a three- to five-year period. During this timeframe, the court will create a repayment plan that details how much each creditor will be paid back. Unsecured debts, past-due amounts that are owed on secured debts, and other fees or expenses may be grouped into this repayment plan. This will allow the debtor to become current on their home mortgage or other secured debts, as well as any domestic support obligations they owe, and they will be able to repay some of what they owe to unsecured creditors. Once the full three- or five-year plan has been completed, any unsecured debts that remain will be discharged.

While secured creditors will generally be paid in full during a Chapter 13 bankruptcy, it may be possible to have second mortgages or junior loans discharged. Lien stripping may be an option if the value of a debtor's home has decreased and has become "underwater," meaning that they owe more on the primary mortgage than the home is actually worth. In these situations, there will be no equity in the home to secure a second mortgage or other junior loans, and these loans may be reclassified as unsecured debts. This will allow these loans to be "stripped off," and they will be discharged once the bankruptcy process is complete.

If you are struggling with debt, you may be looking at different options for getting your finances back on track, including filing for bankruptcy. However, you may have heard some things about bankruptcy that make you hesitant to file. It is important to get the facts before making any decisions about your financial future. There are a lot of myths and misconceptions out there about bankruptcy—and they deter many people from taking action when necessary. Here are some of the most common myths about bankruptcy, debunked:

• Myth #1: Bankruptcy Will Ruin Your Credit Score

Truth: While a bankruptcy filing will stay on your credit report for seven to 10 years, this does not mean that your credit will be completely ruined. In fact, many people who file for bankruptcy see their credit scores increase within two years after their debts are discharged. If you are careful about using credit and make an effort to pay bills on time after your bankruptcy, you will most likely see your score continue to rise.

• Myth #2: You Will Never Be Able to Get Credit Again if You File for Bankruptcy

Truth: While it may be more difficult to obtain new lines of credit right after a bankruptcy, it is certainly not impossible, and there are many lenders that can help people with bad credit get loans. In fact, many people who have filed for bankruptcy are able to get approved for credit within two years post-discharge. Once you start rebuilding your credit, you will likely find it easier to get loans at better interest rates.

For people who are considering bankruptcy, large debts have affected their lives and their finances in many ways. The requirement to make payments toward multiple debts each month may have become impossible, especially if a family is experiencing financial difficulties due to the loss of a job, unexpected expenses, or other issues. To make matters worse, late or missed payments may have led creditors to begin taking action to collect debts. People in these situations often experience harassment from creditors, which may include regular phone calls at home or at work, as well as threats to repossess property or even claims that a person could face criminal consequences due to failure to repay what is owed. 

One of the key benefits of filing for bankruptcy is the fact that doing so will put an "automatic stay" in place that will require creditors to stop attempting to collect debts. The automatic stay is a court order that will force creditors to cease any debt collection actions while the bankruptcy case is ongoing. For those who are thinking of filing for bankruptcy, it is important to understand how the automatic stay works and what it means for creditors.

The Effects of the Automatic Stay

The automatic stay will go into effect as soon as the bankruptcy petition is filed with the court. Creditors will be notified of the bankruptcy, and they will be prohibited from taking any actions to collect the debt. This includes wage garnishment, foreclosure, and repossession. In fact, it applies to any actions that a creditor may take against a debtor, including calling them to seek repayment or sending collection notices in the mail. If a creditor tries to collect a debt or take any action after the bankruptcy has been filed, they may be held in contempt of court. 

Debt can be a problem for many people, especially those who have suffered setbacks that have affected their income and financial resources, such as a serious illness that has limited their ability to work. Fortunately, bankruptcy can be an option for eliminating debts. When you file for bankruptcy in Texas, your case will be assigned to one of two chapters—Chapter 7 or Chapter 13. In order to qualify for Chapter 7, which will allow for the elimination of most debts within a few months after filing, you must pass the means test, which is a way of determining whether your income is low enough to allow you to file for this type of bankruptcy.

How Does the Means Test Work?

The means test is actually quite simple. First, your income is calculated by taking your total household income from the past six months and averaging it out to determine your monthly income. This number will be compared to the median income earned by people in Texas, and this amount will be based on the size of your household. For Texas bankruptcy cases filed after May 15, 2022, the median income for a single person is $55,441, or $4,620 per month. For a married couple, the median income is $74,636, and higher median incomes will apply if a person or couple has children or if there are others who live in their household. If your income is below the median for your family size, you automatically qualify for Chapter 7 bankruptcy.

If your income is above the median, this does not necessarily mean that you will not qualify for Chapter 7. In these cases, your disposable income will be calculated by taking your average monthly income and subtracting different expenses. These include things like mortgage or rent payments, car payments and transportation expenses, utility bills, medical expenses, food and clothing costs, and other necessary expenses. After determining your disposable income per month, this will be compared with the total amount of debt you owe. Generally, if applying your disposable income toward your debts for five years would result in less than 25 percent of your total debts being repaid, then you will pass the means test.

While debt is a significant concern for many people, and bankruptcy is an option that will allow many of these debts to be eliminated, this form of debt relief is often seen as a last resort. This is often because people are concerned about losing all of their assets, including their home or car, when they file for bankruptcy. However, this is not necessarily true, and in fact, many people can complete a "no-asset" bankruptcy in which all of the assets they own will be protected by exemptions. By understanding the exemptions that apply in your situation, you can determine whether you will be able to file for bankruptcy and keep as much of your property as possible.

Bankruptcy Exemptions in Texas

Generally, concerns about the loss of property will only apply in Chapter 7 bankruptcy cases. In this type of bankruptcy, the bankruptcy trustee will liquidate (sell) the debtor's nonexempt assets and use the proceeds to pay creditors. However, many people who file for Chapter 7 bankruptcy do not lose any property because they are able to protect all of their assets using the bankruptcy exemptions that are available in their state.

In Texas, the following exemptions apply in Chapter 7 cases: