What Happens to a Home When One Files Bankruptcy?

By Cindy Hill

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.

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.

Get a free, confidential bankruptcy evaluation. Learn More

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.

Reaffirmation

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.

Get a free, confidential bankruptcy evaluation. Learn More
Bankruptcy Laws Regarding Mortgage

References

Related articles

What Happens to a Cosigned Loan in a Bankruptcy?

When a debtor goes into bankruptcy, the people he owes money to are concerned that they will not receive what is owed them. One possible source of security for the creditor is the existence of a co-signer who is not going bankrupt. When someone co-signs a loan, he is obligated to step in and pay the outstanding loan if the primary borrower cannot meet his obligations. Courts are focused on the debtor’s financial obligations during bankruptcy, but the fact that a debt may be co-signed can make the bankruptcy process a little more complicated.

How to File Bankruptcy With Unsecured Debt

Many people who file for bankruptcy do so because they seek a financial clean slate and relief from a heavy debt burden. Whether you file under Chapter 7 or Chapter 13, the court can discharge – or erase – many of your unsecured debts at the end of your case. Your eligibility to file bankruptcy is not affected by whether your debt is secured or unsecured.

What Happens if I Can't Make My House Payments in Chapter 13 Bankruptcy?

Chapter 13 bankruptcy can give you a financial clean slate by erasing certain debts and giving you a chance to catch up on your payments. However, your mortgage is generally not one of the debts erased by bankruptcy. If you cannot stay current with all your house payments during your Chapter 13 bankruptcy, your lender can foreclose on your home.

Related articles

What Happens if I Don't Reaffirm My Mortgage After Bankruptcy?

Filing for Chapter 7 bankruptcy is a means to discharge your debts and get a financial "fresh start." A home mortgage ...

Provisions of Chapter 13 of the Federal Bankruptcy Laws

Chapter 13 bankruptcy is a form of personal bankruptcy that allows an individual’s debt to be adjusted if he has a ...

Are Rent Arrears Cleared by Bankruptcy?

Rent arrears are usually dischargeable in personal bankruptcy -- but that doesn't mean you can continue to live in your ...

Ways to Prevent the Loss of Your Home in Chapter 7 Bankruptcy

U.S. bankruptcy law serves two purposes. The first is to give people an opportunity for a new start by wiping away some ...

Browse by category
Ready to Begin? GET STARTED