Can I Keep My Home If I File For Bankruptcy?

Whether you can keep your house when you file for bankruptcy depends on several factors, including the type of bankruptcy you file (Chapter 7 or Chapter 13 in the United States), the equity you have in your home, and the exemption laws of your state.

Chapter 7 Bankruptcy and Your House

In a Chapter 7 bankruptcy, assets are liquidated to pay off creditors, but there are exemptions that can protect your home up to a certain value. Here’s how it works:

• Homestead Exemption: Most states have a homestead exemption that allows you to exempt a certain amount of equity in your primary residence. If the equity in your home is less than the exemption limit, you can usually keep your home.
• Equity Calculation: Equity is determined by subtracting the amount you owe on your mortgage from the current market value of your home. If your equity exceeds the exemption limit, the bankruptcy trustee could potentially sell your home to pay creditors, although this is relatively rare.
• Mortgage Payments: If you’re current on your mortgage payments and can continue making them, you’re more likely to be able to keep your home. Falling behind could lead to foreclosure, independent of the bankruptcy process.

Chapter 13 Bankruptcy and Your House

Chapter 13 bankruptcy is often a better option for those trying to keep their homes, as it allows you to reorganize your debts and catch up on missed mortgage payments over time:

• Repayment Plan: Chapter 13 involves proposing a repayment plan to pay back all or a portion of your debts over three to five years. This plan can include provisions for catching up on delinquent mortgage payments while staying current on ongoing payments.
• Automatic Stay: Filing for Chapter 13 bankruptcy puts an automatic stay in place that stops foreclosure proceedings, giving you time to catch up on missed payments through your repayment plan.
• Second Mortgages and HELOCs: In some cases, Chapter 13 allows for the stripping of second mortgages or home equity lines of credit (HELOCs) if your home is worth less than the amount owed on the first mortgage, effectively treating them as unsecured debt.

State Exemption Laws

The ability to keep your home also depends on your state’s exemption laws. Some states offer generous homestead exemptions that protect a significant amount of equity, while others offer minimal protection. A few states allow debtors to choose between state and federal exemption schemes, whichever is more favorable.

Strategic Considerations

• Consultation with a Bankruptcy Attorney: Given the complexities involved, consulting with a knowledgeable bankruptcy attorney is crucial. They can help you understand the specific exemption laws in your state and how they apply to your situation.
• Non-Bankruptcy Alternatives: If keeping your home is your primary concern, explore non-bankruptcy alternatives like loan modification, forbearance agreements, or refinancing with your lender.

Keeping your house when filing for bankruptcy is possible, especially under Chapter 13 bankruptcy or if your home equity is protected by state exemptions under Chapter 7. However, the decision involves careful consideration of your overall financial situation, the type of bankruptcy you’re filing, and the laws of your state. A bankruptcy attorney can provide guidance tailored to your circumstances, helping you make informed decisions about your home and financial future.

Examples

To provide a clearer understanding of how you can keep your house when filing for bankruptcy, let’s explore two examples that illustrate scenarios under Chapter 7 and Chapter 13 bankruptcy filings:

Example 1: Chapter 7 Bankruptcy Scenario

Background: Maria owns a home valued at $250,000, and she owes $200,000 on her mortgage. She lives in a state where the homestead exemption is $60,000. Maria has recently lost her job and is struggling with $50,000 in credit card debt and medical bills. She is considering filing for Chapter 7 bankruptcy.

Situation Analysis: Maria’s equity in her home is $50,000 ($250,000 market value – $200,000 mortgage), which is less than her state’s homestead exemption of $60,000. This means her home equity is fully protected under her state’s exemption laws.

Outcome: After consulting with a bankruptcy attorney, Maria files for Chapter 7 bankruptcy. Because her home equity is fully exempt, the bankruptcy trustee cannot sell her home to pay off unsecured creditors. Maria continues to make her mortgage payments and is able to discharge her unsecured debts while keeping her home.

Example 2: Chapter 13 Bankruptcy Scenario

Background: John and his spouse own a home valued at $300,000, but they’ve fallen behind on their mortgage payments due to John’s unexpected medical expenses. They owe $280,000 on their mortgage and have $30,000 in credit card debt. They’re facing foreclosure and are considering bankruptcy as a way to save their home.

Situation Analysis: John and his spouse decide to file for Chapter 13 bankruptcy to stop the foreclosure and get a handle on their debts. Their proposed repayment plan includes catching up on the $20,000 in missed mortgage payments over a five-year period while also making their regular monthly mortgage payments.

Outcome: The automatic stay in place due to the Chapter 13 filing stops the foreclosure process. John and his spouse’s repayment plan is approved by the court, allowing them to catch up on their missed mortgage payments through the plan while staying current on their ongoing mortgage obligations. By the end of their Chapter 13 plan, they have kept their home, become current on their mortgage, and managed their credit card debt.

These examples highlight the pathways available under both Chapter 7 and Chapter 13 bankruptcy for individuals and families striving to keep their homes amidst financial turmoil. Chapter 7 can offer a way to discharge unsecured debts while protecting home equity under state exemption laws. Chapter 13 provides a structured plan to catch up on mortgage arrears and potentially reorganize other debts, all while preventing foreclosure. Each bankruptcy chapter offers different advantages depending on the debtor’s specific situation, making consultation with a knowledgeable bankruptcy attorney essential for navigating these complex decisions.