The thought of filing for bankruptcy frightens everyone. Bankruptcy (specifically chapter 7) is a legal order allowing the bankruptcy court to seize certain assets because the organization or individual cannot cover outstanding debts. Thus, the first concern that most individuals contemplating bankruptcy have is whether they can declare bankruptcy if they own a home and not lose it.
The response to the above concern is that it depends on what type of bankruptcy you are filing and state laws. But in some cases, you can file for bankruptcy if you have a home. This blog explains when filing for bankruptcy and keeping your home is possible.
Filing for Bankruptcy If You Own a Home Depends on Various Factors
It is a common misconception that you cannot declare bankruptcy when you own valuable property, such as a home, or that you will lose all your property after filing. Although you may lose your home when you declare bankruptcy, things do not have to happen that way. Whether or not you can save your home will be based on these factors:
- Whether or not your mortgage loan is current.
- Your capability to keep making your monthly mortgage payments after and during bankruptcy.
- Your home equity amount if you are late on payments.
- Whether homestead exemption laws will safeguard all the equity.
Ensure you have prepared yourself before declaring bankruptcy by determining when you may lose your house, how exemption statutes protect the equity you have in your home, and why saving your home under a Chapter 13 bankruptcy is easier than a Chapter 7 bankruptcy.
You May Be Able to Save Your Home When Declaring Bankruptcy Under Chapter 7
Chapter 13 and Chapter 7 bankruptcies work differently, so it is essential to comprehend what you have to do to retain valuable properties under either type. Once you file for Chapter 7 bankruptcy, your assets are transferred to the bankruptcy estate, which is administered by a bankruptcy trustee assigned to oversee your situation. The trustee then sells the assets you cannot exempt from the estate and uses the profits to offset your unprotected debts, like personal loans and credit cards.
Declaring bankruptcy under Chapter 7 eliminates your debts more quickly. If you possess a significant amount of home equity that is above the exemption value, you need not declare bankruptcy under Chapter 7 as you would be incapable of protecting the equity and you could lose your home.
Under Federal bankruptcy law, you can save your home if you declare Chapter 7 bankruptcy under given circumstances, based on the equity amount you possess in your home. This is known as the homestead exemption. The exemption amount varies based on mental or physical condition, age, and marital status.
If you cannot afford to make monthly mortgage payments, are late on mortgage payments and cannot catch up, or have substantially more home equity than you are allowed to have (and wish to save your house), do not file a Chapter 7 bankruptcy. Filing bankruptcy under Chapter 13 will be ideal.
The question regarding which assets you can save if you file bankruptcy under Chapter 7 is intricate. In California, we have two categories or systems of state-issued exemptions. Each of these bankruptcy exemptions has different limits and provisions.
As a debtor, you can utilize these exemptions to safeguard your personal and real properties from the trustee's sale of the assets to pay as many lenders as possible the debt you have. The two categories of exemptions fall under Bankruptcy Exemptions Codes 704 and 703. Generally, debtors with home equity prefer 704 exemptions, whereas those owning valuable assets outside home equity (household items, vehicles, jewelry, et cetera) prefer 703 exemptions.
Apart from the two exemption categories, the state's bankruptcy law also has exemptions for pensions, health aids, tools of the trade, and building materials, among other categories. Also, there are government codes that particularly exempt pensions earned by county workers, like firefighters and peace officers.
It is essential to seek advice from a skilled bankruptcy lawyer to establish what exemptions may apply in your case, which exemption system you should opt for, and the claimable amount for every exemption.
Is Your Mortgage Payment Current?
When you declare bankruptcy under Chapter 7, the automatic stay temporarily stops a foreclosure. However, if you are late on mortgage payments when you declare bankruptcy, all you can wish for is to stall the bankruptcy process for some months.
Bankruptcy under Chapter 7 prevents you from becoming current on past-due payments. This causes a problem since mortgages are secured debts, and bankruptcy under Chapter 7 does not eliminate the lien that allows the creditor to repossess the house if you do not pay. At the lifting of the automatic stay, the creditor can foreclose and you will lose the home.
If you declare Chapter 7 bankruptcy, the creditor can request that the judge lift the automatic stay if you are delinquent on mortgage payments so the foreclosure proceeding can continue. The judge will more likely grant the creditor's request if your trustee does not plan on selling the home. Alternatively, the creditor can wait for the bankruptcy period to end, proceed with foreclosing the house, and sell it at auction.
Can You Keep Making Mortgage Payments After Filing Bankruptcy Under Chapter 7?
It is also critical to be confident you can afford to keep making mortgage payments after declaring bankruptcy under Chapter 7 since losing the home after the proceedings may leave you in a worse financial situation. If you wish to keep the home, can afford it, can protect the equity, then yes, absolutely keep making the payments.
How Much Home Equity Do You Have?
If you are current on your mortgage payments, your next move will be establishing how much home equity you have. You will begin by appraising your house and subtracting the outstanding loan balance from the house value to obtain your home equity. Equity refers to the amount you would have after selling your home and making mortgage payments.
If you do not have equity, you are safe. Trustees do not sell homes without equity. If you have equity, you must protect it with an exemption so you do not lose the house when you declare bankruptcy under Chapter 7.
The Trustee Can Abandon Your House During Bankruptcy
Your trustee under Chapter 7 may find your house is not worth pursuing in a bankruptcy proceeding and abandon it. If this happens, the home remains yours without any restrictions. Abandonment occurs when the cash available to repay creditors does not justify the money and time involved in the home sale.
The trustee determines whether selling the home will generate adequate funds for making meaningful payments on your unprotected debts, like utility and medical bills, personal loans, and credit card balances. The following are factors your trustee will look at:
- The home’s appraisal value.
- The amount the home will sell at, including inspections, repairs, and sales commissions.
- The amount the trustee will pay from the sale proceeds, like their commission, property taxes, mechanic’s lien, property tax lien, mortgages, and the exemption value.
- Whether they must give the home co-owner some proceeds.
Consider this example: Let us say your house appraises at two hundred thousand dollars, the mortgage payment is one hundred and forty thousand dollars, and the exemption amount is twenty thousand dollars, leaving forty thousand dollars in non-exempt equity. Your trustee estimates that the cost of selling the house plus commission will be $22,000, leaving $18,000 to pay lender claims. In this case, chances are high that your trustee will sell the home.
If the trustee is interested in your home equity, you may be capable of protecting the home from being sold. You can do this by agreeing with your trustee to substitute exempt property or money to "purchase" the property back from the trustee. For example, in our case above, you may consent to paying your trustee eighteen thousand dollars from your exempt retirement funds, borrowing from a sympathetic relative or friend, taking out a home equity loan, or selling your other exempt assets, such as artwork or jewelry.
Protecting Your Home With Chapter 13 Bankruptcy
Under Chapter 13, you can save both your non-exempt and exempt property since you will not liquidate your assets when you declare bankruptcy under this chapter. Under Chapter 13, as the debtor, you propose to your trustee a repayment plan whereby you will make monthly payments to your creditors (for between three and five years).
Usually, you will make these payments to your trustee, who will distribute the funds equally to your creditors. Consequently, you keep your personal and real property and repay the value you owe to your lenders over three to five years.
Under Chapter 13, you can keep your house even if the creditor has initiated foreclosure proceedings or you are late on your mortgage. You will devise a repayment plan incorporating payment of the overdue mortgage. After the approval of your plan, you will keep your house, provided you remain up-to-date with the payments.
According to statistics, about 50 percent of debtors filing for Chapter 13 bankruptcy cannot make payments through the entire period. Therefore, you want to be practical about your ability to make payments throughout the whole period of bankruptcy.
Like mortgage debts, you can pay and be up-to-date on overdue car payments under a Chapter 13 bankruptcy. You can extend the number of payments or reduce the interest and principal rate balance if the car is old enough.
Because you are paying back all or some of your debts under Chapter 13 and maintaining both your non-exempt and exempt assets, you need not be concerned about the number or limit of exemptions, as it depends on the trustee's approval of your repayment plan.
Disadvantages of Keeping Your Home When Bankrupt
You may need to retain your home even if you have a huge debt and are considering declaring bankruptcy, and understandably so. Not only does your home have an emotional and physical attachment, but it could be a valuable asset someday, even if you are late on payments.
That said, keeping your home through bankruptcy proceedings has some financial disadvantages. If you declare bankruptcy under Chapter 13, you must keep making your mortgage payments and pay the overdue amount. This could be challenging, even if your repayment plan seems doable.
As mentioned, about 50 percent of bankruptcies under Chapter 13 fail. Committing to a repayment plan for three or five years is tough, although modifications are possible. Modifications involve returning to court to explain why you require one. After modifying your plan, you still must be up-to-date on your mortgage loan payments and all other payments you consented to in your plan.
If you declare bankruptcy under Chapter 7 and retain your home, you must be able to make monthly payments. The only channel for modification is through the bank. Matters regarding bankruptcy are complex, and if you are worried about retaining your home, they are even more intricate. If unsure whether to declare bankruptcy, consult a credit counselor and a bankruptcy lawyer first.
Seeking credit counseling can assist you in developing a plan to manage your debts, so you can make payments you can afford and avoid filing for bankruptcy. If your credit counselor can work with your lenders to reduce the interest rates and payments on your unprotected debts, such as credit cards, you could avoid filing for bankruptcy.
And even if you have decided to declare bankruptcy, Federal bankruptcy law requires you to first talk to a credit counselor. Bankruptcy courts have lists of credit counselors. You should contact one before declaring bankruptcy.
Find An Experienced Sacramento Bankruptcy Attorney Near Me
Worrying about what will happen to your home when you declare bankruptcy is natural, and you want to understand everything before deciding. A bankruptcy lawyer can explain everything you should know regarding whether you can file for bankruptcy if you have a home. You, therefore, should consult one if you are considering bankruptcy.
At Sacramento Bankruptcy Lawyer, we will advise you whether it is a good idea to declare bankruptcy and under what chapter you should file. Call us today at 916-800-7690 for fast, confidential legal services.
