What happens to your house if you file for bankruptcy?
Your home is your biggest asset. It is your family’s security and often full of memories and emotion. It is also a great investment. Protecting your home is of the utmost importance.
So, what happens to your home in a Bankruptcy?
The good news is that in most of the cases, your home can be protected during the Bankruptcy process. Even better, some types of Bankruptcy will allow you to prevent a foreclosure and later pay off any past-due mortgage interest free. Let’s discuss:
Chapter 7 Bankruptcy:
People primarily use Chapter 7 Bankruptcy to relieve themselves of unsecured debts (think credit cards). This allows them to stay on top of other debts (mortgage, car payments, etc.).
However, you cannot have too much home equity when filing a Chapter 7 Bankruptcy. If you do, the Court has the ability to sell your home to pay creditors. There is a Homestead Exemption that you can use to protect your equity (the value of which changes yearly). If your equity is under the Exemption amount, the Court has no right to sell your home.
So, the first step is to figure out if you can protect the value of your home with the Homestead Exemption. If so, then you are okay to file a Chapter 7 which can lead to the Discharge of your unsecured debts making it easier to stay on top your mortgage payments.
However, Chapter 7 will not strip the lien of a secured debt. What does this mean? If you are behind on your mortgage (and facing foreclosure) you will need to use a Chapter 13 to protect your home.
Chapter 13 Bankruptcy:
Unlike Chapter 7 Bankruptcy, a Chapter 13 Bankruptcy involves the repayment of debts (what percentage of repayment is determined based on income and “excess” equity in property). Instead of losing your property, you create a payment plan to cover the portion of equity that isn’t exempt. The repayment of debt is done through a “Chapter 13 Repayment Plan.”
While most people would prefer to have the complete Discharge of debt given through a Chapter 7, a Chapter 13 Bankruptcy allows them to put any unpaid mortgage into their Plan and pay it off, usually interest free, over a longer period of time, usually five years.
During the Bankruptcy period, as long as payments are made to the Court and the individual stays up to date on their current mortgage payments, all foreclosure proceedings are stayed.
Important Things to Know:
In both Chapter 7 and Chapter 13 Bankruptcies, you can keep your assets if they’re covered by an exemption. Each state has its own list of exemptions, so what you can protect and how much equity you can keep will vary depending on where you live. You can use either Federal or State Bankruptcy exemptions, depending on your individual requirements. As with all things involving the law, it’s important to get the right advice to understand your options.
Conclusion:
Filing Bankruptcy does not have to mean the loss of your home. In fact, it may be what saves it. It’s important to understand your state’s exemption rules to know what your options are so you can make the decision that works best for you.