Texas Bankruptcy and the Discharge of Secured Debts

In Texas, bankruptcy serves as a vital financial tool for individuals and businesses struggling with overwhelming debt. One of the most common questions that arises during the bankruptcy process is whether secured debts can be discharged. Understanding the discharge of secured debts under Texas bankruptcy law is essential for anyone contemplating bankruptcy as a solution to their financial troubles.

Secured debts are obligations backed by collateral. This means if you fail to make payments, the lender has the right to seize the collateral to recover the debt. Common examples of secured debts include mortgages and auto loans, where the house or vehicle acts as collateral for the loan.

Texas residents have the option to file for either Chapter 7 or Chapter 13 bankruptcy, and the treatment of secured debts varies significantly between these two types of bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," allows individuals to eliminate most unsecured debts quickly. However, the treatment of secured debts in Chapter 7 is a bit more complex. If you file for Chapter 7, the automatic stay temporarily halts all collection activities and prevents creditors from seizing your property. However, secured debts are typically not discharged in Chapter 7 bankruptcy.

If you want to keep the secured property, like your home or car, you must continue making payments to avoid repossession or foreclosure. Alternatively, you can choose to surrender the property, allowing the lender to reclaim it. This means you can eliminate your personal liability for the debt, but you will lose the collateral. However, Texas residents benefit from certain exemptions that may allow them to protect some secured property, depending on its value.

Chapter 13 Bankruptcy

In contrast, Chapter 13 bankruptcy is often referred to as "reorganization bankruptcy." This option is designed for individuals with a regular income who wish to repay some or all of their debts over a period of three to five years. Secured debts can be treated differently in Chapter 13, offering more flexibility than in Chapter 7.

In Chapter 13, you can propose a repayment plan that allows you to catch up on missed payments on secured debts while simultaneously discharging other unsecured debts. Moreover, if your car loan was taken out more than 910 days before filing for bankruptcy, you may benefit from a "cramdown" provision, which enables you to reduce the balance owed on the car to the vehicle's current market value, subject to certain conditions.

Additionally, in Texas, you can keep your homestead through Chapter 13 bankruptcy as long as you keep up with your mortgage payments, thereby allowing you to save your home from foreclosure.

Conclusion

While Texas bankruptcy laws do not typically allow for the discharge of secured debts, understanding your options can help you regain financial stability. Whether opting for Chapter 7 or Chapter 13 bankruptcy, it remains critical to consult with a qualified bankruptcy attorney who can guide you through the complexities of the bankruptcy process. By exploring your rights and options, you will be better prepared to tackle your debts and work toward a more secure financial future.