When a homeowner files for bankruptcy, one of the primary considerations often on his mind is whether he can keep his home, or whether it must be surrendered to satisfy debts. A debtor filing personal bankruptcy under Chapter 7 or Chapter 13 might be able to keep his home, depending on how much equity he has in the house and whether he can maintain the mortgage, property tax and homeowners insurance payments.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy involves liquidating the debtor's assets to pay his debts. A debtor in Chapter 7 bankruptcy can secure a discharge of unsecured debts, such as credit card bills, medical bills, personal loans and civil judgments, as well as some late taxes. Other taxes, student loans and criminal restitution cannot be discharged in a Chapter 7 bankruptcy.
Home Equity Limits in Chapter 7
Whether or not a person who is filing bankruptcy under Chapter 7 can keep his home depends on how much equity he has in the house, as well as what state he is filing in. Every state has a different homestead exemption level, which sets the amount of home equity an individual may exempt from the assets being sold to satisfy creditors under Chapter 7. As long as the debtor's equity in the home is less than the amount allowed by state law in his state, he may keep the house. If his home has more equity than the exemption limit allows and he files under Chapter 13 bankruptcy, instead of Chapter 7, he may avoid having the trustee sell the house.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is available to debtors who continue to have regular income. Chapter 13 allows debtors to keep more of their property than under a Chapter 7 bankruptcy, but the debtor must enter into a payment plan to repay most of his outstanding debts. Portions of unsecured debt, and other debts that cannot be paid under the Chapter 13 plan, may be discharged after the debtor completes the plan payments.
Keeping a Home and Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, the debtor may keep his house even if he has more equity than is exempt under state homestead exemption laws, provided he can keep up with all mortgage, property tax and homeowners insurance payments. If you are behind on mortgage payments but qualify for a Chapter 13 bankruptcy, you may be able to roll your past-due payments into the Chapter 13 repayment plan and pay those past-due amounts back over the course of the three to five years the plan is in effect.
Mortgage companies often send a debtor a request to reaffirm their mortgage after a bankruptcy filing. Reaffirmation is not a mandatory step to keeping your home, but it does have serious legal consequences. If you sign a mortgage reaffirmation, you will never be able to discharge the mortgage, but must pay it in full with timely payments to avoid future foreclosure. In most instances, you can remain in the home and make the mortgage payments without reaffirmation. Keeping a house, especially one mortgaged for more than its present market value, may not be the best decision, however. Each debtor should weigh the emotional and economic costs of letting the house go and renting or purchasing a new, less expensive home against the obligations of maintaining the present house.