My friend is considering purchasing the most expensive home her and her spouse can afford, along with a nice vehicle, and then filing for chapter 7 bankruptcy after 6 months. According to her, TX’s bankruptcy laws will let her keep her home and vehicle, and discharge the debt owed on the mortgage. Is this true? She said she knows some people that do this every 7 or so years… What’s the straight dope?
Texas has a homestead law which means that, if you take advantage of it, that you can’t lose you home to creditors if things go bad. It sounds like these people are playing the system and I would guess they are breaking the law.
The Texas statute:
is very broad. But they will not be able to keep the property from a mortgage company. Exemptions from execution only apply against general unsecured creditors in a bankruptcy. A party with a security interest keeps the security interest. A mortgage is a security interest. They will have to reaffirm the debt, or the mortgage company can have the automatic stay lifted and begin foreclosure procedings.
so that’s the straight dope? She -may- be breaking the law? This can’t be true…
Buying things with the intention of having the debts discharged in bankruptcy is fraud, btw. And if the creditors can prove it, those debts are non-dischargeable.
Why not? It is true that some people have done this and gotten away with it, but that does not make it legal.
There is a big difference between secured and unsecured debt.
The idea behind secured debt is to protect the creditor in case of bankrupcty or default. That is why it is called secured.
Here is a FAQ about bankrutcy in Texas.
Enjoy!!
My previous post was referring to adam’s post. I was submitting it before you had replied. I was aware that it was fraud, but it seems to me the law immensely favors the debtor.
I retract this statement. I just read up on the homestead act, and it does not protect a debtor from its mortgage lenders. Well then it sounds to me like my friend’s friends are full of BS!
The premise of bankruptcy law is a fresh start for an honest debtor. So, yes, honest debtors get a major break. And the presumption is that they are honest. If they get greedy, the landscape changes, though. And there can be severe penalties for bankruptcy fraud.
I think you will find the FAQ I posted helpful in dispelling any legal lore that may be circulating.
Oops,
I forgot to post the FAQ
Weren’t homestead exemptions capped at $100,000 as part of the federal bankruptcy reform act passed a few years ago?
Yes. That was my point. The scheme of the OP’s friend is a deadend.
From the FAQ you cited.
I got to thinking about it. Are you SURE that she wanted to discharge the mortgage debt? Perhaps she was intent on discharging everythign ELSE.
Another deviation of this would be to, while still having good credit, buy the house and car. Then spend tons on unsecured credit (e.g.- credit cards).
Then, file the bankruptcy and continue to pay on the car and house, but default on the unsecured debt. This allows the debtor to have her cake and eat it too. She has the luxuries without having to pay for the accessories (imagine how much furniture and decorations you could buy by maxing out credit.)
You can afford to pay a larger house note if you don’t have to worry about paying your previous bills.
The act passed both houses, but remains a Bill because it died on Clinton’s desk, and has not been actively pursued since then. The act is one of those things that most bankruptcy practitioners know will eventually become law, but right now it is not.
Isn’t 100,000 incredibly low for a homestead exemption cap? Especially in certain regions of the country?
I think it is. But consider some examples:
Ohio $5000
Michigan $3500 (though if the property is owned as entireties property, it is not subject to the debts of a single spouse).
Hawaii $30,000
Federal $7500
- These numbers may have been increased because the book I consulted is ten years old.
- There are other exemptions that may be used to save a home.