Often the biggest worry that comes along with declaring bankruptcy is that you could lose your home.
Though it depends on the situation, having the knowledge and a good bankruptcy attorney can help you navigate this process and better understand what could happen to your house if you file.
Consider the Type of Bankruptcy You’re Filing
You can file for different types of bankruptcy, and what type you do will be one determining factor in what happens to your home.
Chapter 7 bankruptcy is a liquidation bankruptcy, where you must give any non-exempt property that you have in exchange for most of your debts being wiped out.
Chapter 13 bankruptcy is a reorganization bankruptcy, where you do not hand over any property but you are required to make a structured repayment plan that shows how you will use your income to pay off your debts over time, typically three to five years.
In general, Chapter 7 exemptions are much lower, stricter, and offer less flexibility than Chapter 13 exemptions. If you file a Chapter 13 bankruptcy, you are much more likely to keep your house than if you file a Chapter 7.
Generally, bankruptcy can protect your home, holding off a foreclosure. Chapter 13 bankruptcy is designed to allow you to keep your home, even if you are behind on payments. If you keep your house after filing for Chapter 7, the fact that your other debts are cleared should make it easier to pay your mortgage.
Look at Your Equity
Even if you do file Chapter 7, you may be able to keep your home. When filing, the trustee only considers the equity in your home.
Many bankruptcy filers have little or negative equity in their houses, so they are exempt and need not be sold in the bankruptcy process.
If, however, you have equity in your home over the exemption limit, you may be forced to sell your house to pay your debt or buy it back by paying the trustee the value of your house.
Consider Your Mortgage Payments
If you do keep your home after the bankruptcy process, will you be able to afford your monthly mortgage payments? If so, you can keep your house.
However, if you find that your income is still unable to meet these payments, the bank may eventually foreclose on your home.
If you’re behind on your mortgage payments and can’t catch up, you can surrender your house under a Chapter 7 filing. If you’re behind and file Chapter 13, it can be easier to catch up as you are now working off a payment plan to do so.
Downsides to Keeping Your House
Though you may desperately want to keep your home, sometimes it’s in your best interest to let such a financial burden go. Weigh all options before making this decision, but keep the following in mind.
If you file for Chapter 13 bankruptcy, you have to continue making your monthly mortgage payments, as well as pay what you were behind on. This can be difficult, and almost two-thirds of Chapter 13 bankruptcies fail.
If you file for Chapter 7 and keep your house, you must make the monthly payments.