What Is the Rule With Homes and Bankruptcy?
What is the rule with homes and bankruptcy?
When it comes to your home and bankruptcy, there are two general rules you need to be aware of:
Bankruptcy Doesn’t Give You a Free Home
First, if you wish to keep your home, you’re going to have to be able to pay the mortgage. Filing for bankruptcy protection doesn’t give you a free house. Bankruptcy can eliminate credit card debts and medical bills, but requires secured debts (such as mortgages and car loans) to be paid after filing if you want to keep the property. Be aware that you do have the option of surrendering a home in bankruptcy, which protects against a deficiency lawsuit.
Know Your Home Equity Before Filing Bankruptcy
Second, assuming you can afford your monthly mortgage payments, you can keep your home through the bankruptcy process if your home equity is exempt. What does this mean?
Every state has enacted laws that specify how much property an individual in that state can protect from their creditors. These laws are called exemptions. As explained in the post What are Bankruptcy Exemptions?
Exemption laws allow debtors to keep basic property safe from creditors regardless of how much they owe. The idea behind exemptions is that debtors should never have their last dime taken by a creditor. The problem is, that each state has different definitions of what property is needed to get by. For example, each state allows cars, homes and property up to certain dollar amounts to be absolutely shielded from creditors.
For example, let’s say the homestead exemption in state A is $50,000, meaning residents of state A can protect up to $50,000 of home equity from creditors. Jeff is considering filing for bankruptcy in state A, but is concerned about losing his home. Jeff’s home has been appraised at $350,000 and he has a mortgage of $310,000.
In this example, Jeff would be able to file for bankruptcy and keep his house by utilizing state A’s homestead exemption. State A allows debtors to protect $50,000 of home equity and according to an appraisal, Jeff has $40,000 of equity. A home is at risk of being liquidated in a chapter 7 bankruptcy only when there is non-exempt equity that exceeds the amount allowed to be protected under state or federal law.
Explore Your Options With an Attorney
It should be noted that even if you have non-exempt equity in a home, you still may be able to retain it by filing for chapter 13 bankruptcy. To read more about chapter 13 bankruptcy click here.
If you are considering bankruptcy and are concerned about losing your home, talk to an attorney. Learning about your state’s laws can offer some much needed piece of mind.
A bit more information for your readers. I am a board certified bankruptcy attorney in Ohio. In some jurisdictions, it is not uncommon to file a chapter 7, AND NOT REAFFIRM ON THE HOUSE, thus discharging the debtor’s personal liability, but continue to make the house payments and continue to live in the house. The advantage to this, from the debtor’s view, is that if the debtor later is unable to pay for the house, the creditor can repossess it through foreclosure, but the personal liability of the debtor is gone.
Thanks for the comment. For all of you playing along at home, the advantage of having personal liability on the mortgage removed by filing bankruptcy is that after foreclosure your lender cannot come after you for a deficiency judgment. The bankruptcy essentially converts a recourse loan into a non-recourse loan where the lender’s only avenue of collection is the home.