How to Keep Your House in Bankruptcy
If you’re drowning in debt and thinking about filing for bankruptcy, there’s probably one big question lingering in your mind: Will I lose my house? It’s a valid fear, but with the right strategy, you can often keep it.
It all comes down to understanding your options, the type of bankruptcy you file, and how your home fits into the bigger financial picture. With this in mind, let’s take a look at how to protect your home and still take full advantage of the debt relief that bankruptcy offers.
Start With the Right Type of Bankruptcy
There are two main types of bankruptcy individuals typically file: Chapter 7 and Chapter 13. They both offer protection from creditors, but they operate in very different ways when it comes to your home.
Chapter 7 is often referred to as “straight bankruptcy.” It’s faster, typically taking only a few months, and it wipes out many forms of unsecured debt like credit card balances and medical bills. But it’s also known as a liquidation bankruptcy – meaning, in theory, some of your assets could be sold to pay off creditors.
“Often referred to as a ‘straight bankruptcy,’ a Chapter 7 filing represents a dramatic step toward a fresh start. Debts are discharged, often providing a clean slate,” Reed Law Firm, P.A. explains. “Though Chapter 7 is known as a liquidation of assets, most necessary assets such as your home, vehicle and household goods are exempt from liquidation. That means you usually can keep all or most of your assets and still get out of debt.”
This exemption is key. In most cases, if you’re current on your mortgage and your home equity is within the exemption limits, you won’t lose your home in Chapter 7.
Chapter 13, on the other hand, involves a repayment plan spread out over three to five years. It’s especially useful if you’ve fallen behind on your mortgage but want to catch up and avoid foreclosure. It doesn’t require you to sell any property. Instead, you work with the court to make affordable payments based on your income.
Get Familiar With How Exemptions Work
Every state has a set of bankruptcy exemptions. Some states let you choose between their exemption system and the federal one. These rules limit how much equity in your home can be protected, so knowing how much equity you have is a crucial step.
As a quick refresher, equity is basically the difference between what your home is worth and what you still owe on the mortgage. If the amount of equity is less than the exemption limit, your home is typically safe in a Chapter 7 filing.
Let’s say your state allows a $75,000 homestead exemption, and you owe $200,000 on a house that’s worth $260,000. That means you have $60,000 in equity, which is below the exemption limit. In that case, your house is protected. But if your equity is significantly above the limit, a Chapter 13 filing may be the better route for keeping your home.
Keep Paying Your Mortgage
Bankruptcy can eliminate or reduce many of your debts – but it doesn’t erase secured debts like a mortgage. If you want to keep your home, you’ll need to continue making mortgage payments during and after the bankruptcy process.
Staying current is important. If you fall behind, especially during a Chapter 7 case, your lender can request the court’s permission to proceed with foreclosure. (In Chapter 13, missing payments can cause your case to be dismissed.)
If your goal is to keep your home, make it a priority to stay up to date, or work with your attorney to include catch-up payments in your bankruptcy plan.
Use Bankruptcy to Stop Foreclosure
If you’re already behind on your mortgage and facing foreclosure, filing for bankruptcy can actually help stop the process (at least temporarily). Once you file, an automatic stay goes into effect. This court order stops most collection actions, including foreclosure proceedings.
In Chapter 13, this stay gives you the breathing room to create a plan for catching up on missed payments while keeping your house. Over three to five years, you pay a portion of your debt based on your income, and as long as you stick to the plan, you’re protected from losing your home.
Even in Chapter 7, the automatic stay can buy you some time to explore your options, negotiate with your lender, or prepare for a more orderly transition if keeping the house isn’t realistic.
Get Professional Help Early
Bankruptcy laws are complicated, and you can’t afford to gamble with your home. That’s why we recommend getting help as early as possible.
A qualified bankruptcy attorney can help you choose the right filing and structure your case to protect your home. They’ll also deal with the court and creditors on your behalf.
If you’re serious about keeping your home and getting out of debt, this isn’t something to DIY. A good attorney will make the process less stressful and much more effective. Hire one and start the process!
