Contrary to popular belief, filing for Bankruptcy as a homeowner doesn’t automatically mean you lose all assets, including your house. Your ability to keep your house despite filing for bankruptcy depends on a host of factors that we will explore here.
What is Bankruptcy?
Bankruptcy happens when someone can’t pay their outstanding debt. As part of the bankruptcy process, the debtor’s assets are evaluated and liquefied in an effort to pay down the outstanding debt.
Bankruptcy offers a fresh start to a person or business by allowing debts to be written off while giving creditors a fair chance to recoup some of the debt owed. This is down by liquidating the debtor’s assets.
If you have already made the decision to file bankruptcy, you may have a hard time managing your financial affairs. Whether or not you can keep your house depends on the following factors:
- The type of bankruptcy you plan to file
- The amount of equity you have in your house
- Your ability to make your monthly mortgage payments
There are two main types of bankruptcy: Chapter 7 and Chapter 13. There is a slight difference between them in terms of the exemption the government offers to you. Both types protect your assets by granting you state exemption. This exemption will, of course, vary by state. The main goal of bankruptcy is to pay back the maximum amount of money owed to creditors.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is relatively simple and gives a shorter plan for establishing the homeowner’s financial stability. In the event the state exemption is less than the entire amount of the equity in your home, a court-appointed trustee will sell the property and use the proceeds to settle some of your other debts, like credit cards and medical bills.
Can you keep your house if you file for Chapter 7 bankruptcy? Well yes, if:
- Your bankruptcy covers all of your home equity;
- You have a mortgage; and
- You are able to continue making your mortgage payments.
It would be hard to file Chapter 7 bankruptcy and keep your house if the amount of the state exemption is less than the amount of equity you have in your home. Once the house sells, the trustee will use the nonexempt equity to pay off any other creditors.
Chapter 13 Bankruptcy
In this type of bankruptcy, you would not have to abandon the property. Instead, you would be asked to pay the nonexempt portion of the equity. It might be financially challenging for you if that amount is a significant amount.
You can keep your house if you file Chapter 13 bankruptcy since you are placed on a 3 – 5 year repayment plan to settle your debts. You could even treat the repayment plan as a conventional loan and add it to your payment plan.
However, in order to keep your house after filing Chapter 13 bankruptcy, you have to provide convincing evidence that you can pay the bankruptcy repayment plan amount and the monthly Mortgage payment at the same time.
The best thing about filing Chapter 13 bankruptcy is that your mortgage lender can’t foreclose on your home as long as you’re paying both the repayment and abiding by your mortgage terms, including making mortgage payments on time.
How Much Equity Do You Have?
Equity is the amount of the house you own based on the amount of money you’ve paid towards the loan principal. In other words, it is the market value of your property after subtracting the amount still owed towards your mortgage or home equity loans. When bankruptcy filers have little or negative equity in their houses, they can take advantage of bankruptcy exemptions and can keep their houses.
Trustees only consider the equity in your house when deciding whether you qualify for the bankruptcy exemptions under Chapters 7 or 13. If you have more equity in the home than the exempted amount, you will have to sell the house to pay back your debt.
Can You Pay Your Monthly Mortgage Payments?
The upshot is if you survived the bankruptcy process and did not lose ownership of your home. You will be able to keep your house afterward. The bankruptcy will allow you the opportunity to rid yourself of all the rest of your debt which will make paying your mortgage payments less burdensome for you.
On the contrary, if you don’t have enough money to pay your mortgage payments. The bank might foreclose on your home.
Filing bankruptcy provides you with a unique opportunity to get your financial life under control. Therefore, take all the time you need to decide whether you should file bankruptcy. Depending on your circumstances, you may be able to walk away from the mortgage and house with no additional financial consequences.
The Bottom Line
In a nutshell, it is possible to keep your house even after you file for bankruptcy. However, it depends on the unique circumstances around your bankruptcy.
Having said all that, keeping a house after filing bankruptcy is a highly technical task with which most homeowners are not familiar. Therefore, if you plan to keep your house after filing bankruptcy, you should consider consulting with an attorney.
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