How to Keep Your House in Bankruptcy

Authored by Wendy Witt, Esq.

Bankruptcy attorneys tell us that this is often the first question that they are asked, "Will I Lose My House if I File Bankruptcy?" We understand. Our homes are a safe zone for our families and, fortunately, the law recognizes that we all need somewhere to call home.

Keeping Your House: Filing Chapter 7 v. Chapter 13 Bankruptcy

Chapter 13

If you file for bankruptcy protection under Chapter 13 of the U.S. Bankruptcy Code, you can absolutely keep your house so long as you can make the mortgage, tax, and insurance payments.

Filing Chapter 13 may actually help you to keep your house because your debts are reorganized meaning that they may be renegotiated under more favorable terms.

  • Debt principal may be reduced.
  • Interest charges may be reduced or eliminated.
  • Past due payments are stretched out over 3 to 5 years.
  • Unsecured second and third mortgages may be eliminated.

All of this makes it easier to meet your monthly house payments.

Chapter 7

If you file for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code, you can keep you house so long as you can make the mortgage, tax, and insurance payments AND so long as any equity in the home is covered by your bankruptcy exemptions (or some other exemption or law).

Filing Chapter 7 may actually help you to keep your house because some non-secured debts are discharged. For example, when you no longer have to pay credit card, medical, and personal debts, you have more money to pay for housing expenses.

  • Many unsecured debts are discharged.
  • There is NO stretch out of remaining debt and NO renegotiating of that debt.
  • If a house is underwater, second and third mortgages may be eliminated.
  • Some states limit the equity protected through the homestead exemption.

In theory, Chapter 7 is the "liquidation bankruptcy", meaning that the debtor's assets are sold to pay off his or her creditors. However, most Chapter 7 filers don't lose any assets, including their homes.

Because we all need a place to live and home ownership benefits society, states protect all or part of the equity in our homes.

Equity is the difference between the fair market value of your home and how much you owe the bank or mortgage lender.

  • For example, if your home has a fair market value of $100,000 and you owe $80,000 on your mortgage, the equity in the home is $20,000. That's $100,000 - $80,000 = $20,000.
  • For example, if your home has a fair market value of $250,000 and you owe $150,000 on your mortgage, the equity in the home is $100,000. That's $250,000 - $150,000 = $100,000.

Homestead exemptions vary greatly from state to state and change as the law changes. A bankruptcy attorney will be able to explain the current homestead exemption for your state of residence. In addition, he or she will also be able to guide you in protecting additional equity through wild card or other means (such as tenancy by the entireties law).

  • For example, if you are a Florida resident, your homestead exemption is unlimited. This means so long as you can make the requisite payments, you can keep your house no matter how valuable. If you own a $1 million home outright, you can keep it and file bankruptcy successfully.
  • For example, if you are a New Jersey resident, your homestead exemption is $0 so homeowners may want to use the optional federal exemptions that protect $21,625 for a single filer and $43,250 for a married couple filing jointly.

Federal exemptions allow an additional $1,150 wild card for individual filers and $2,250 for married filers, filing jointly.

In addition, New Jersey has tenancy by the entireties protection that protects assets owned as husband and wife from the creditors of just one of the spouses.

  • For example, if you are an Illinois resident, your homestead exemption is $15,000 for single filers and $30,000 for married filers, filing jointly. Illinois does recognize tenancy by the entireties.

Illinois has an additional wildcard exemption that can be used to protect an additional $4,000 (individual filers) and $8,000 (married filers, filing jointly).

Keeping Your House: The Bottom Line

While some of the homestead exemptions look quite low, in reality most people do keep their homes as they go through and come out of bankruptcy.

  • If you file Chapter 13 and can make the payments, you can keep your house.
  • If you file Chapter 7, you probably don't have a lot of equity in your house and if you do, it may be covered by the homestead and wild card exemptions or tenancy by the entireties laws.
  • Of course, in both Chapter 7 and Chapter 13 bankruptcies, you do need to be able to make the mortgage, tax, and insurance payments (past, present, and future).

It's imperative that you consult with a qualified bankruptcy attorney who will analyze your case and guide you in protecting your home during bankruptcy, determining whether bankruptcy is right for you, deciding whether Chapter 7 or Chapter 13 is appropriate for you, and protecting the most assets possible.

You are welcome to find and select a bankruptcy attorney through our free and private website, www.attorneys.org. If you choose to contact an attorney through our site, you are entitled to a free case evaluation. Be sure to ask your bankruptcy lawyer about protecting your home.

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