Will I Lose My Home If I File For Bankruptcy?

A Little Texas History

People sometimes ask me, “If I file bankruptcy, will I automatically lose my home?” Fortunately, in Texas, the answer is generally No.

A little Texas history here…

Back when Texas was trying to become a Republic; back when we were struggling to define ourselves as a sovereign state (“state”- meaning, like a country; not “state” like, part of the United States), many of those who settled in Texas were being aggressively pursued by their creditors, even across national borders.

At that time, it was still the 1820’s and Texas was not yet part of the United States; in fact, it was still part of Mexico which had just obtained its independence from Spain. In order to successfully gain recognition as a sovereign state, Texas needed sufficient population so that it could govern itself. At the time, however, the vast territory of Texas was largely uninhabited. In order to encourage people to come and settle in Texas, the founders of the Republic of Texas saw that Texas needed to become a safe haven for those settlers and give them protection from those nasty foreign creditors.

Stephen F. Austin, who eventually came to be known as the Father of Texas, came up with a novel idea: to limit the creditors’ ability to seize property in order to collect on these foreign debts. He recommended this new idea to the law makers of Mexico, and in 1829, they set forth Decrees that exempted certain property from seizure by those creditors. This provided much needed relief to Texas settlers. This protection, however, lasted only a short while.

Meanwhile, in 1836, Texas had its own revolution and declared its independence from Mexico. Texas sealed its independence when it defeated General Santa Anna in the battle of San Jacinto.

With their newfound independence, the people of Texas remembered the value and importance of the homestead protections that they enjoyed a decade earlier and built them into the Texas act of 1839. This protected family homesteads from being seized by creditors.

In 1845, as Texas prepared to join the United States, Texas adopted a new constitution. This new constitution embodied the idea of homestead exemptions and made it a constitutional matter. The homestead protections have remained part of the Texas Constitution ever since then.

Interestingly enough, this concept of protecting homesteads was pretty new, and Texas is credited for inventing the idea and putting it into law. After Texas introduced the idea of Homestead Exemptions, other states began to follow the Texas example, and incorporated homestead exemptions into their own laws and constitutions.

So, in Texas, homeowners may declare their homestead exemption so that they may protect their home from seizure by their judgment creditors.

This is not to say, though, that a Mortgage Creditor, which got its lien through a contract rather than through a judgment, cannot foreclose on your home. The Mortgage Contract specifically gives the Mortgage Company the right to foreclose and repossess the home if you do not pay the house note. But at least this Mortgage Lien was given voluntarily, whereas a Judgment Lien was created because someone may have sued you.

If a person falls behind in his mortgage payments and faces a threat of foreclosure, he may take advantage of the bankruptcy laws to free up money to get caught up with his house note. The bankruptcy laws may force the mortgage company to hold off on its foreclosure while the person catches up on his mortgage payments.

Bankruptcy is designed to help you keep your home if you want to keep it. If you no longer wish to keep your home or find that you simply cannot afford to keep it, you may surrender it, give it back to the bank, and let them worry about selling the home, even if they have to sell it at a loss. The bankruptcy laws may then help you avoid having to pay for any deficiency when the home is sold and help you get a fresh start. This may spare you from the effort and expense of fixing up the home just so you can sell it to someone else.