Could I Lose My Home If I File for Bankruptcy?

Owning a home has been a part of the “American Dream” for generations. If you’re struggling with debt, you might fear losing one of the most valuable assets you own – your home – when you file for bankruptcy relief. But, with the right strategy, you should be able to keep your home and some other assets with personal bankruptcy.

Will I Lose My Home If I File for Bankruptcy?

Most people file for bankruptcy to get relief from overwhelming debt. And much of that debt is unsecured, meaning it isn’t backed by an asset like a home or vehicle. When you eliminate the debt you are unable to pay, it can make it easier to keep your home.

Mortgages are considered secured debt, meaning the lender has an ownership interest in the property. As long as you continue to make payments, you’ll probably be able to keep your home. But there are some exceptions.

When you file for personal bankruptcy, the three factors that determine whether you can keep your home include:

• The type of bankruptcy you file (Chapter 7 vs. Chapter 13)
• How much equity you have in your home
• If you can afford your continuing mortgage payments

The Type of Bankruptcy You File and Your Home

When you file for personal bankruptcy, you’ll have the choice between filing for Chapter 7 or Chapter 13. There are similarities and differences between the two. If you’re behind on your mortgage, Chapter 7 may not be the best option because there is no mechanism available to help you get caught up.

As long as you are current with your mortgage payments, you may be able to keep your home with either Chapter 7 or Chapter 13. You are entitled to certain exemptions with bankruptcy. An exemption refers to the value of the property you can keep.

The goal of bankruptcy is to give you a fresh start, not to leave you homeless. There are federal and state bankruptcy exemptions. But state exemptions often either mirror or take precedence over federal ones. Basically, if your property is worth less than the exemption value, you don’t have to give it up.

As a general rule, Chapter 7 bankruptcy exemptions are lower and less flexible than Chapter 13 exemptions. While you may be able to keep your home with either type of bankruptcy, you have a better chance with Chapter 13.

How Much Equity Do You Have in Your Home?

When you file for bankruptcy, the court assigns a trustee to your case. That trustee is the one that reviews your debts, deals with creditors, and decides what you can keep and what must be liquidated or surrendered.

When you file for Chapter 7 bankruptcy, the trustee doesn’t look at the “value” of your home but rather how much equity you have in it. Equity refers to the market value of your home minus the balance of any loans.

With Chapter 7, equity is essential. If you have equity in your home that is substantially above the exemption limit, the trustee will probably sell your home to pay off some of your unsecured debt.

With Chapter 13, you won’t have to sell your home no matter how much equity you have. But you might have to pay for the nonexempt portion of your equity as part of your repayment plan.

Can You Still Afford Your Mortgage Payments?

If you decide to keep your home during the bankruptcy process, the trustee will want to see that you can afford to make the ongoing payments. After all, it wouldn’t make sense to file for bankruptcy protection only to put yourself in a poor financial position moving forward.

As long as your income allows you to make the mortgage payments considering your new reduced debts, you can probably keep your home. But you may want to take a different approach. Bankruptcy offers you a unique opportunity to walk away from a mortgage as you wipe the slate clean with your other debts. If this is in your best interests, it may be worth considering.

Gulf Coast Bankruptcy Attorney works diligently to provide residents throughout the Gulf Coast region with the information they need to make informed decisions about bankruptcy and their financial future.