If I Own A Home, Can I File For Chapter 7 Bankruptcy?

Owning a home does not automatically disqualify you from filing for Chapter 7 bankruptcy. The key factors that will determine whether you can keep your home include the amount of equity you have in the property, the exemptions available to you under state or federal law, and whether you are current on your mortgage payments. Here’s an expanded look at these considerations, illustrated with examples:

Equity and Exemptions

Equity Consideration: For instance, let’s say Alex owns a home valued at $250,000, and he owes $200,000 on his mortgage. This means Alex has $50,000 in home equity. If Alex lives in a state where the homestead exemption is $60,000, he can file for Chapter 7 bankruptcy and likely keep his home because his equity does not exceed the exemption limit.

Exemption Laws: Consider Jane, who lives in a state with a generous homestead exemption of $100,000. Jane’s home is worth $300,000, and she owes $250,000 on her mortgage, leaving her with $50,000 in equity. Under her state’s exemption laws, Jane can file for Chapter 7 and protect her home equity entirely, allowing her to keep her home.

Current on Mortgage Payments

Mortgage Arrears: Michael is behind on his mortgage payments by $10,000 when he files for Chapter 7 bankruptcy. Although the automatic stay temporarily halts foreclosure, it doesn’t erase the past due amount. In Michael’s case, Chapter 7 won’t help him catch up on those payments, and he risks losing his home to foreclosure after the bankruptcy unless he can negotiate a solution with his lender.

Non-Exempt Equity

Selling the Home: Emily has $150,000 in equity in her home, but her state’s homestead exemption only covers $75,000. This means there’s $75,000 in non-exempt equity that the bankruptcy trustee could use to pay her creditors. In this scenario, the trustee might sell Emily’s home, use $75,000 to pay off creditors, and give Emily the exempted $75,000.

Considerations

State vs. Federal Exemptions: Tom lives in a state that allows debtors to choose between state and federal exemptions. The federal homestead exemption might offer less protection than his state’s exemption, but the federal exemption could be more beneficial for protecting other assets. Tom decides to use state exemptions to maximize the protection of his home equity.

Reaffirmation Agreements: Sarah has filed for Chapter 7 bankruptcy but wants to keep her home. She enters into a reaffirmation agreement with her mortgage lender, committing to continue making her regular mortgage payments despite the bankruptcy. This agreement keeps Sarah in her home but also means she remains liable for the mortgage debt.

While homeownership complicates the Chapter 7 bankruptcy process, it doesn’t make filing impossible. Whether you can keep your home depends on navigating the interplay between your home’s equity, applicable exemptions, and your mortgage status. Through examples like those of Alex, Jane, Michael, Emily, Tom, and Sarah, it’s clear that individual circumstances significantly influence the outcome. Consulting with a bankruptcy attorney can help you understand your options and strategies for protecting your home during Chapter 7 bankruptcy, ensuring you make informed decisions tailored to your specific situation.