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Will I lose my house if I file for bankruptcy?
Debtors considering whether or not to file Chapter 7 or Chapter 13 bankruptcy may be most concerned about protecting certain assets, especially their house.
Whether or not filing bankruptcy will cause a debtor to lose their house, however, will depend on the bankruptcy laws in their state, whether they file Chapter 7 or Chapter 13 bankruptcy, how long they have owned their home, and the amount of equity they have in their house.
Bankruptcy Exemptions and Protecting Property
All states have established exemptions that protect a portion of an asset’s equity, which is owned by the debtor, from creditors. The equity, or the liquidation value, is the amount that the debtor would retain if they sold the asset, minus any liens.
Both federal and state laws outline bankruptcy exemptions. Although some states allow the debtors to choose whether they want to use federal or state exemptions, other states force debtors to use the state exemptions.
In some cases, claiming a homestead exemption may allow debtors to keep their house when they file Chapter 7 or Chapter 13 bankruptcy. Let’s review each type of bankruptcy to determine how a house may be treated.
Filing Chapter 7 Bankruptcy: Will I Lose My House?
Debtors who file Chapter 7 bankruptcy may discharge certain unsecured debts. Chapter 7 bankruptcy; however, allows the bankruptcy trustee to seize certain non-exempt assets, sell the assets, and use the monies from the sale to repay debts. If the homestead is generous enough, however, it may protect the home.
For example, Kansas, Florida, Iowa and Texas provide an unlimited dollar value homestead exemption. Other states, such as Oklahoma, offer a $10,000 homestead exemption. Many states, however, do not have homestead exemptions, but they may allow the debtor to use federal homestead exemptions (which are currently $22,975 or $45,950 if you are married and jointly filing bankruptcy).
So let’s look at an example. If you own a home worth $400,000 but you owe $300,000, your equity in the home is currently $100,000 ($400,000 - $300,000). If you live in a state where the homestead exemption is $100,000 or greater, your home will be protected and cannot be sold by the trustee.
What happens if you live in a state that only offers a $50,000 homestead exemption? In this case, the trustee may decide to sell the house and use the proceeds from the sale to repay your creditors, although you will be paid the exempt amount.
If you want to file Chapter 7 bankruptcy and keep your house, it’s important to talk to a bankruptcy lawyer. Bankruptcy lawyers can help you maximize the bankruptcy exemptions offered in your state. They may also help you negotiate other options with the trustee, such as “buying back” the excess value in the property, assuming that you pay a fair value. In some cases, you may also be able to negotiate directly with the lender to save your home.
Consider, however, that it will be more difficult for homeowners with expensive homes and high equity levels to protect their homes when they file Chapter 7 bankruptcy.
Filing Chapter 13 Bankruptcy: Will I Lose My Home?
Chapter 13 bankruptcy does not discharge debts immediately but allows the debtor to repay their debts through a debt reorganization plan over a three or five-year period. Under Chapter 13 bankruptcy, the trustee will not seize any assets but will help the debtor create and submit a plan to the bankruptcy court to repay a portion of their debts.
In most cases, filing Chapter 13 can allow debtors to keep their home. Debtors can include any mortgage payments in arrears in their plan. Debtors will, however, have to continue to make monthly mortgage payments to their lender until their mortgage debt is paid in full.
If you are considering filing Chapter 13 bankruptcy and you have a good deal of non-exempt equity in your home, this can affect how much you will have to pay to your unsecured creditors. Talk to your bankruptcy lawyer for more information about your homestead exemption and how this might increase your estimated payments within your Chapter 13 bankruptcy repayment plan.
Can I Discharge My Mortgage Debt through Bankruptcy?
Another point of confusion for some debtors is whether or not they can discharge their mortgage debt by filing bankruptcy. Unfortunately, mortgage debt is never discharged by filing bankruptcy. Mortgage debt is a secured debt, which is collateralized by the home. If a debtor fails to make mortgage payments, the creditor simply forecloses on the property and sells the house.
Bankruptcy rules vary by state, including the type of property protected under the homestead exemption. Domicile rules also vary by state. Talk to your lawyer if you have purchased your home within 40 months prior to filing for bankruptcy. In this case, there may be a cap on the exemption that you can claim for your homestead, although exceptions exist if you bought your home with proceeds from another sale within your state.