Can I File Bankruptcy If I Own a Home?

Filing for bankruptcy can be a complex process, especially when a home is involved. While it is possible to file for bankruptcy and own a home, the outcome for the property depends on the amount of home equity, the specific bankruptcy chapter chosen, and applicable exemption laws. This article outlines how a home may be affected during bankruptcy proceedings.

Understanding Home Equity and Exemptions

Home equity represents the portion of a home’s value owned by the homeowner. It is calculated by subtracting any outstanding mortgage balances and other liens from the home’s current market value. For instance, a home valued at $300,000 with a $200,000 mortgage has $100,000 in equity. This equity is an asset in bankruptcy.

To protect assets from creditors during bankruptcy, debtors can utilize “exemptions.” These provisions allow a debtor to keep a specified amount of value in various types of property. The “homestead exemption” specifically protects equity in a primary residence.

The amount of equity protected by a homestead exemption varies significantly. Some states allow debtors to choose between federal bankruptcy exemptions and their state’s specific exemptions, while others require the use of state exemptions only. The federal homestead exemption, for example, is $27,900 for individual filers and $55,800 for married couples filing jointly. State exemptions can range from a few thousand dollars to an unlimited amount.

If a homeowner’s equity falls below the applicable homestead exemption limit, the home is generally protected from liquidation by the bankruptcy trustee. If the equity exceeds the exemption amount, the non-exempt portion is at risk. For example, if a home has $100,000 in equity and the exemption is $50,000, the remaining $50,000 in non-exempt equity could be subject to creditors. Debtors must have resided in the state for a specific period, typically 40 months or two years, to claim the full state homestead exemption.

Chapter 7 Bankruptcy and Your Home

In a Chapter 7, a liquidation bankruptcy, a court-appointed trustee reviews the debtor’s assets to determine if any non-exempt property can be sold to repay creditors. Home treatment in Chapter 7 depends on its equity and the available homestead exemption. If the home’s equity is fully covered by the homestead exemption, the trustee generally cannot sell the property, and the homeowner can keep it as long as mortgage payments are maintained.

If there is non-exempt equity, the trustee may have the authority to sell the home. The trustee would sell the property, pay off any liens, and then distribute the exempt portion of the proceeds to the homeowner. Remaining funds would pay unsecured creditors, after deducting sales costs and trustee fees.

Many Chapter 7 cases are “no-asset” cases, where all property is protected by exemptions, and no liquidation occurs. Homeowners with non-exempt equity might “buy back” the non-exempt portion from the trustee by paying an equivalent amount to the bankruptcy estate. Alternatively, they may choose to surrender the property, allowing the lender to foreclose. To keep their home and continue making mortgage payments, a reaffirmation agreement may be considered, which re-establishes personal liability for the mortgage debt.

Chapter 13 Bankruptcy and Your Home

Chapter 13 bankruptcy, often referred to as a wage earner’s plan, allows individuals with regular income to reorganize their debts through a repayment plan. This chapter is frequently used by homeowners who want to keep their homes, especially if they have fallen behind on mortgage payments. Chapter 13 halts foreclosure proceedings immediately upon filing, thanks to the automatic stay.

The repayment plan, typically spanning three to five years, allows debtors to “cure” mortgage arrears, meaning they can catch up on missed payments over time. The homeowner continues to make regular mortgage payments directly to the lender while simultaneously paying past-due amounts through the Chapter 13 plan. This structured approach can prevent foreclosure and allow the homeowner to reinstate their mortgage.

Chapter 13 can also protect a home with non-exempt equity, unlike Chapter 7, where such equity might lead to liquidation. Instead of selling the home, the debtor pays the value of the non-exempt equity to unsecured creditors through the repayment plan. This ensures unsecured creditors receive at least as much as they would in a Chapter 7 liquidation, while allowing the homeowner to retain the property. Chapter 13 also provides “lien stripping,” which can eliminate junior liens, such as second mortgages or home equity lines of credit, if the home’s value is less than the balance of the first mortgage. If successfully stripped, these junior liens are reclassified as unsecured debt and are discharged if the Chapter 13 plan is completed.

Mortgage Obligations During Bankruptcy

Mortgage obligations change depending on the type of bankruptcy filed. In Chapter 7, while personal liability for the mortgage debt may be discharged, the lien on the property generally remains. This means the lender can still foreclose if payments are not made. To continue owning the home and making payments, a debtor may enter into a reaffirmation agreement.

A reaffirmation agreement is a voluntary, legally binding contract where the debtor agrees to remain personally liable for a debt that would otherwise be discharged in bankruptcy. It allows the debtor to keep the home and continue building credit history with the lender. However, if the debtor defaults on the reaffirmed mortgage in the future, the lender can pursue collection efforts beyond just foreclosing on the property. This decision requires careful consideration, as it re-establishes a financial obligation the bankruptcy was intended to eliminate.

In Chapter 13, mortgage payments are integrated into the repayment plan. The debtor must make ongoing regular mortgage payments, in addition to any payments to cure arrears. The Chapter 13 plan provides a structured way to manage these payments, and failure to adhere to the plan can lead to its dismissal, potentially exposing the home to foreclosure. If a home is surrendered in either chapter, the lender will proceed with foreclosure, and the debtor’s personal liability for any deficiency balance may be discharged, depending on the bankruptcy type and specific circumstances.

The Bankruptcy Filing Process

Initiating the bankruptcy process requires several steps, beginning with mandatory credit counseling from an approved agency within 180 days before filing the petition. This counseling helps individuals explore alternatives and manage their finances. The cost for this pre-filing counseling typically ranges from $20 to $50, with some agencies offering fee waivers based on income.

Following counseling, the debtor prepares and files the bankruptcy petition and supporting schedules with the court. These documents require a detailed accounting of all assets, debts, income, and expenses, including precise information about the home, its value, and any mortgages or liens. Accurate and complete disclosure is essential.

Approximately 21 to 40 days after filing, the debtor must attend a “341 Meeting of Creditors.” This meeting, conducted by the bankruptcy trustee, is not a court hearing and typically does not involve a judge. The debtor testifies under oath, answering questions from the trustee and potentially creditors about their financial affairs and the information in their bankruptcy paperwork.

Before receiving a discharge of debts, debtors must also complete a second mandatory course, known as the debtor education course or personal financial management course. This course focuses on budgeting and financial management skills. Like credit counseling, it typically costs between $10 and $50, and fee waivers may be available. Upon successful completion of all requirements, including the repayment plan in Chapter 13, the court issues a discharge order, legally releasing the debtor from personal liability for most debts.