What Happens to My House If I File Bankruptcy?

Filing for bankruptcy can be a complex decision, often raising concerns about its impact on a primary residence. For many, a home represents a significant asset and a sense of stability. Understanding how bankruptcy proceedings interact with homeownership is important for those navigating financial distress. This article explores the various ways a bankruptcy filing can affect a home, from the different types of bankruptcy chapters to the role of exemptions and mortgage management.

How Bankruptcy Chapters Affect Your Home

Bankruptcy law offers different paths to debt relief, primarily through Chapter 7 and Chapter 13, each with distinct implications for a homeowner’s residence. Chapter 7, known as liquidation bankruptcy, involves a bankruptcy trustee selling non-exempt assets to repay creditors. If a home has equity exceeding available exemptions, the trustee might sell the property, distribute the exempt amount to the homeowner and use the rest to satisfy debts. However, if a mortgage is current and the home’s equity is fully protected by exemptions, homeowners may be able to retain their residence in a Chapter 7 filing.

Chapter 13, referred to as reorganization bankruptcy, provides a structured payment plan over three to five years, allowing individuals to keep their assets, including their home. This chapter is particularly useful for homeowners who are behind on mortgage payments, as it allows them to catch up on arrears through the repayment plan while continuing to make regular monthly payments. The automatic stay, which goes into effect upon filing, temporarily prevents foreclosure actions, providing homeowners time to address their financial situation.

Utilizing the Homestead Exemption

The homestead exemption is a legal provision designed to protect a certain amount of equity in a primary residence from creditors during bankruptcy. It ensures individuals can retain some home value, preventing complete loss during Chapter 7 liquidation. The protection offered by the homestead exemption varies; individuals can choose between federal exemptions or their state’s laws.

To determine how much equity is protected, a homeowner calculates their equity by subtracting the outstanding mortgage balance and any other liens from the home’s current market value. If this equity falls within the homestead exemption limit, the home is protected from liquidation in Chapter 7. If equity exceeds the exemption, a Chapter 7 trustee may sell the home, but the homeowner receives the exempt amount. In Chapter 13, if a home has non-exempt equity, that amount must be included in the repayment plan.

Managing Your Mortgage During Bankruptcy

Managing a mortgage during bankruptcy involves specific considerations depending on the chosen chapter. In Chapter 7, if a homeowner wishes to keep their property, they may consider a reaffirmation agreement. This is a legally binding promise to repay a debt that would otherwise be discharged, allowing the debtor to continue payments and retain the property. While not always required, a reaffirmation agreement ensures the debt remains personally owed and payments are reported to credit bureaus.

Chapter 13 offers a structured approach to address mortgage arrears through a repayment plan, typically spanning three to five years. This plan allows homeowners to cure past-due payments by including them in the monthly payments made to the bankruptcy trustee, alongside their regular mortgage payments. This prevents foreclosure and helps homeowners get current on obligations.

Another option in Chapter 13 is “lien stripping,” which can convert wholly unsecured junior liens (e.g., second mortgages or home equity lines of credit) into unsecured debt if the home’s value is less than the balance of the first mortgage. This stripped debt is treated like other unsecured debts in the payment plan and discharged upon completion.

Alternatively, homeowners can choose to surrender their home in bankruptcy, voluntarily giving up the property to the lender. This action discharges the personal liability for the mortgage debt, meaning the homeowner will not owe any remaining balance if the sale does not cover the full loan.

What Happens to Your Home After Bankruptcy

After a bankruptcy case concludes, the home’s status and associated mortgage depend on actions taken during proceedings. If a home was surrendered in bankruptcy, the personal obligation to pay the mortgage debt is typically discharged, relieving the former homeowner of financial responsibility for any deficiency after the property is sold. While the property is no longer the debtor’s, the discharge frees them from the debt.

For those who kept their homes, regular mortgage payments continue post-bankruptcy. If a mortgage was reaffirmed in Chapter 7, payments continue as per the agreement, and credit reporting reflects them. In Chapter 13, upon successful completion of the repayment plan, any cured arrears are satisfied, and the homeowner is current on the mortgage.

Selling a home after bankruptcy is possible, though the bankruptcy filing remains on credit reports for several years (typically seven to ten years). Obtaining a new mortgage after bankruptcy is feasible, but generally requires a waiting period varying by chapter and loan type. Conventional loans may require a two to four-year waiting period, while some government-backed loans might have shorter waits, sometimes allowing applications even in a Chapter 13 plan after on-time payments.