Can You File for Bankruptcy and Keep Your House?

When facing significant financial challenges, many individuals worry about the security of their home, particularly when considering bankruptcy. The prospect of losing one’s residence is a primary concern for homeowners exploring debt relief options. While bankruptcy proceedings can impact home ownership, it is often possible to retain a home through this process.

Protecting Your Home Through Exemptions

Exemptions are legal provisions allowing individuals to protect certain assets from liquidation by a bankruptcy trustee. These exemptions are designed to ensure that a debtor retains a basic level of property necessary for a fresh start. For homeowners, the homestead exemption is particularly significant, protecting a portion or, in some cases, all of the equity in a primary residence. The specific amount of the homestead exemption varies considerably across states.

Equity in a home is calculated as its current market value minus any outstanding mortgage debt or other liens against the property. For example, if a home is valued at $300,000 and the remaining mortgage balance is $200,000, the homeowner has $100,000 in equity. If the homeowner’s equity falls within the state’s homestead exemption limit, the home is generally protected from being sold by the bankruptcy trustee.

However, if the equity exceeds the applicable homestead exemption, the home may be considered a non-exempt asset. A bankruptcy trustee might sell the home to satisfy creditors, with the homeowner receiving the exempted portion of the equity from the sale proceeds. Therefore, a thorough understanding of the state’s specific homestead exemption laws and an accurate calculation of home equity are crucial steps in determining the potential for home retention during bankruptcy.

Bankruptcy Chapters and Your Home

The ability to keep a home during bankruptcy largely depends on the specific chapter of bankruptcy filed. The two most common types for individuals are Chapter 7 and Chapter 13, each offering different approaches to debt relief and asset protection.

Chapter 7, often referred to as liquidation bankruptcy, involves the sale of non-exempt assets by a court-appointed trustee to repay creditors. If the equity in a home exceeds the state’s homestead exemption, the trustee may sell the property. However, if the home’s equity is fully protected by the homestead exemption and the mortgage payments are current, it is often possible to keep the home. Chapter 7 does not provide a mechanism to catch up on missed mortgage payments, meaning that if a homeowner is behind, the lender can still pursue foreclosure.

Chapter 13 bankruptcy is a reorganization process that allows individuals with a regular income to propose a repayment plan to their creditors over a period of three to five years. This chapter is frequently utilized by homeowners who wish to keep their homes, especially if they are behind on mortgage payments. Chapter 13 incorporates mortgage arrears into the repayment plan, allowing the homeowner to catch up on past-due amounts while continuing to make ongoing mortgage payments. As long as the homeowner adheres to the terms of the court-approved repayment plan, including timely mortgage payments, the home is typically protected from foreclosure.

Managing Your Mortgage Obligations

Navigating mortgage obligations during bankruptcy requires careful consideration, as the approach differs significantly between Chapter 7 and Chapter 13. In Chapter 7, while the underlying mortgage debt may be discharged, the lien on the property remains. Homeowners who wish to keep their homes in Chapter 7 often consider a reaffirmation agreement. A reaffirmation agreement is a voluntary agreement between the debtor and the mortgage lender to remain personally liable for the mortgage debt, effectively excluding it from the bankruptcy discharge.

Choosing not to reaffirm the mortgage in Chapter 7 means the homeowner is no longer personally liable for the debt, but the mortgage lien still exists. The homeowner can continue making payments and keep the property as long as payments are made, but if payments stop, the lender can still foreclose without pursuing a deficiency judgment against the homeowner.

In Chapter 13, managing mortgage obligations is central to the repayment plan. If a homeowner is behind on mortgage payments, the Chapter 13 plan provides a structured way to cure these arrears over the plan’s duration, typically three to five years. The plan will outline how the past-due amounts will be repaid, along with ongoing regular mortgage payments. It is crucial for the homeowner to maintain current mortgage payments throughout the Chapter 13 plan, in addition to making the plan payments, to avoid foreclosure and ensure the retention of the home.

Information Needed for Filing

Preparing to file for bankruptcy, especially when a home is involved, necessitates gathering a comprehensive collection of specific financial documents and property-related information. This detailed preparation ensures that the bankruptcy petition accurately reflects the individual’s financial situation and property interests. Essential documents include the property deed, which confirms legal ownership and provides details about the property’s title. Current mortgage statements are also vital, as they show the outstanding loan balance, interest rate, and payment history.

Other important documents include:

• Original loan documents, such as the promissory note and mortgage or deed of trust, providing the foundational terms of the home loan.
• Property tax assessments, necessary to establish the home’s official assessed value and any outstanding tax liabilities.
• If a recent appraisal has been conducted, providing a copy of the appraisal report helps in accurately determining the property’s current market value, which is crucial for calculating equity.
• Details regarding homeowner’s insurance policies, including policy numbers and coverage amounts.
• Any records of home equity loans or lines of credit (HELOCs).

This information is meticulously reviewed to determine the home’s equity, verify ownership, identify all creditors with an interest in the property, and ensure compliance with bankruptcy court requirements.

The Bankruptcy Filing Process

Once all necessary information has been meticulously gathered and the bankruptcy petition prepared, the formal filing process begins. The petition, along with all supporting schedules and statements, is submitted to the bankruptcy court. This filing immediately triggers an “automatic stay,” which temporarily halts most collection activities against the debtor, including foreclosure proceedings on the home.

The Meeting of Creditors, also known as the 341 meeting, typically occurs about a month after the petition is filed. During this meeting, the bankruptcy trustee, and sometimes creditors, can ask questions under oath about the information provided in the petition, including details about the home and its value. The trustee’s role involves reviewing the petition, verifying the accuracy of the debtor’s assets, and determining if there is any non-exempt equity in the home that could be liquidated for the benefit of creditors.

The trustee will examine the homestead exemption claimed and the calculated equity to decide whether the home falls within the protected limits. If the home’s equity is fully exempt, the trustee generally will not pursue the sale of the property. However, if non-exempt equity is identified, the trustee may take steps to sell the home, or in a Chapter 13 case, the non-exempt equity might need to be paid through the repayment plan. Throughout this process, the homeowner must continue to comply with court directives and maintain communication with the trustee.