Deadbeat Homeowners Tap Texas Bankruptcy Laws
This pisses me right off. I pulled this off my newsfeed this morning. As I mentioned in Bail Out My Mortgage, skirting what is owed on delinquent mortgages is just despicable. Until the U.S. gets rid of non-recourse mortgage laws, it’s always going to be too easy for borrowers to walk away and give the keys to the bank when the property value falls below the amount owed on the loan. Non-recourse mortgages give homeowners a free put option on the value of their property, and a tax deductible interest payment to boot; who wouldn’t want a piece of that pie?!
Homeowners fleeing underwater mortgages in California and Florida know where to come up for air: Texas.”Texas is an extremely friendly place to live if you owe money and do not want to pay,” said Marjorie Britt, a bankruptcy attorney with Britt & Catrett PC in Houston.
“If you have a lot of money and even more debt and want to shelter your assets, you can live fairly normally.”
Distressed borrowers can hang on to luxury cars, a primary residence, paychecks, retirement accounts, and even jewelry that creditors might claim elsewhere, Britt said.
A still-robust job market draws nonresidents trying to get away from houses worth less than what they owe on the mortgage, said Jay Westbrook, a business-law professor at the University of Texas in Austin. These newcomers find employment, buy a home in Texas, and mail lenders the keys to the house they abandoned.
Texas bankruptcy filings involving delinquent out-of-state mortgages increased by at least a third in the past year, said Jan Northrup, a lawyer with Hughes Watters Askanase and a bankruptcy trustee in the U.S. District of Southern Texas. Many involve people who moved from Florida, California, Colorado or Arizona, she said.
“We’re especially seeing people who were using their credit cards to pay their mortgages, hoping their houses would sell, who were just digging themselves deeper into a hole,” Northrup said.
Tough to Collect
Lenders in most states can sue to recover the difference between the mortgage balance and proceeds from selling the repossessed house, Westbrook said. Once a borrower has relocated to Texas, such judgments can’t be satisfied with alimony, child support or garnisheed wages.
“You can’t escape collection actions in Texas,” Britt said. “But can they actually force you to pay them? No.”
With U.S. bankruptcies on the rise, claims in Texas courts may come under closer scrutiny. Banks may fight borrowers who bought new homes in Texas “after the creditors were circling like wolves,” Northrup said.
The value of homes and assets that can be retained after bankruptcy is stipulated under U.S. law, while each state sets its own parameters. Debtors may file under the federal code or under their state’s exemptions, Northrup said.
Texas has the most generous provisions for what debtors may keep, far more than other states, said Wayne Kitchens, a bankruptcy attorney with Hughes Watters Askanase in Houston.
“We’ve seen people come in with pensions of over $1 million, and they can’t be touched,” Northrup said.
Creditors can’t tap Texans’ pensions, life-insurance policies, annuities, or properly funded IRA and 401(k) retirement plans. As much as $240,000 per child in a 529 college-savings account can be sheltered, Britt said.
Debtors may save a primary residence in Texas of any value, as long as it occupies no more than 10 acres within a city or 200 acres in a rural area. That compares with a $20,200 homestead-equity exemption for an individual under the federal code. New York and California allow $50,000, while Tennessee and Kentucky grant $5,000, according to the statutes.
The Texas exemptions allow a family to keep as much as $60,000 in personal property, compared with less than $40,000 under the federal code.