Filing for bankruptcy is stressful, especially if you have property on the line. Will you be forced by the court to sell your house or will you be able to keep living there? The good news is that you’ll probably be able to stay in your home during and after declaring bankruptcy. Bankruptcy isn’t about stripping you of every last asset and throwing you out on the street — it’s about giving you a fresh start while also taking your debt obligations seriously.
Whether you’re able to keep your home during bankruptcy is going to depend on a few different factors:
- The amount of home equity you have (your home’s value minus your mortgage balance)
- The type of bankruptcy you’re filing
- Whether you’re current on your mortgage payments or have fallen behind
So how do you go about declaring bankruptcy while keeping your home? Let’s go over the basics, and discuss some of your options.
The basics of bankruptcy & your mortgage
There are two main types of bankruptcy filings: Chapter 7 and Chapter 13. Each one treats your assets (including your home) differently. Neither of them allows you to discharge your home loan since a mortgage is secured debt (if you have multiple mortgages on your home, you might be able to discharge those). This is why you don’t automatically lose your home when you file for bankruptcy.
Chapter 7 bankruptcy
A Chapter 7 bankruptcy is probably what you think of when you hear the term “bankruptcy”. The court liquidates your assets, discharges your unsecured debts, and everything is over in a few months.
To increase your chances of keeping your home through Chapter 7, you should catch up on all your mortgage payments and arrange a loan modification with your lender so you can demonstrate to the court that you can keep up your payments.
If you keep your house through a Chapter 7 bankruptcy, it can be easier to make your mortgage payments when you come out the other side, since most of your other debts will have been discharged, freeing up cash flow.
Chapter 13 bankruptcy
In a Chapter 13 bankruptcy, assets aren’t liquidated and you stay in your home. Instead, the court and your creditors come up with a repayment plan (usually spread out over 3 to 5 years) for you to pay off a portion of your debts.
A Chapter 13 bankruptcy doesn’t erase your debts immediately; it just gives you some breathing room and a concrete plan to pay a portion of them off. Once you reach the end of your repayment schedule without missing any payments, any remaining unsecured debts are discharged.
If you’ve fallen behind on mortgage payments, these back payments will be rolled into the total debt you have to pay off throughout the plan. This means that post-Chapter 13, you’ll have to make your monthly mortgage payment plus your Chapter 13 debt payment which will include missed mortgage payments.
Protecting your home in bankruptcy filings
Home equity is the value of your home minus what you still owe. Say you still owe $240,000 on your mortgage but your home is valued at $300,000. In this example, you’d have $60,000 in equity.
Bankruptcy law provides what’s known as a homestead exemption, which protects a certain amount of your equity from bankruptcy proceedings. These exemptions vary by state, though the federal homestead exemption is $29,700.
Let’s say you declare Chapter 7 bankruptcy and you have $60,000 of equity in your home. If your state has a $50,000 homestead exemption, you’ll probably get to stay in your home since seizing and selling your home would only generate $10,000 on paper. On the other hand, if your state has a smaller $10,000 homestead exemption, selling your home would generate a lot more money which increases the odds that it could be caught in the crossfires.
The process is similar if you declare a Chapter 13 bankruptcy. The court will add up all your assets to decide how much you have to pay per month throughout your payment plan. A homestead exemption keeps a big chunk of your home equity out of that equation and lowers your monthly debt payment. making it more likely that you’ll be able to handle your mortgage payment and be able to keep your home post-bankruptcy.
Keep in mind that Chapter 13 is designed to keep you in your home, but it’s not guaranteed to do so. While overall bankruptcies are trending downward, more than half of Chapter 13 bankruptcies fail before the end of the plan, which often leads to foreclosures.
Decide: Do I really want to keep my house?
If you’re underwater on your mortgage (you owe more than the home is worth) bankruptcy can provide a way out. In a typical scenario, if the bank foreclosed on your home and sold it but the sale didn’t cover what you still owed on your mortgage, you’d have to pay the difference out of pocket. If you surrender the home during bankruptcy, however, you wouldn’t be responsible for paying that difference.
However, you’ll also have to stay current on your mortgage payments in order to keep your home. Unless you surrender, you remain on the hook for making mortgage payments. If you miss them, there’s the risk you could end up losing your home anyways. Choosing to keep your home out of bankruptcy proceedings can be a gamble.
So make sure you definitely want to stay in your home before declaring bankruptcy. If you decide you do want to keep your house, the plan is pretty simple:
- Catch up on your mortgage payments (and stay current with payments)
- Check how much equity your state’s homestead exemption covers
- Demonstrate you can make your mortgage payments going forward
If you’re not sure what to do about your home when filing for bankruptcy and would like guidance from experienced debt experts, call 1-888-503-5563
Article last modified on January 5, 2023. Published by Debt.com, LLC