What Is the Rule With Homes and Bankruptcy?
There are generally two:
First, if you wish to keep your home, you’re going to have to be able to pay the mortgage. Bankruptcy can eliminate unsecured debt such as credit cards, but requires that secured debts be paid after filing if the debtor wishes to keep the colatteral (car, home, boat etc.) In some cases, when a homeowner is already underwater on their first mortgage, a second or third mortgage can be modified or stripped.
Second, assuming you can afford your mortgage, you can keep your home through the bankruptcy process if your home equity can be protected by an available exemption. What does this mean? As a matter of public policy, 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. For example, let’s say the homestead exemption in state A is $50,000. 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.
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.
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.