If you and your significant other file bankruptcy as a family, you have a couple of options. You may file Chapter 7 bankruptcy or Chapter 13 bankruptcy. The amount of equity you have in your home could determine the course your bankruptcy case will take.
Chapter 7 Bankruptcy
By filing Chapter 7 bankruptcy, you acknowledge to the federal government that you cannot pay your debts as they come due. The U.S. Bankruptcy Court offers help in the form of discharging your debts. Afterward, you no longer have to pay those debts. In exchange for discharging debts, however, the federal government wants to find as much money as possible with which to pay your creditors. A bankruptcy trustee assigned to your case will examine your property to determine if he can sell any of it and use the money to pay the your creditors.
Your Home and Chapter 7
The bankruptcy trustee cannot just sell any property he wants, however. Your state’s exemption laws determine which property he can sell. Most states designate a home as exempt from sale. Even if your state lists a home as an exemption, the bankruptcy trustee could still sell your home if you have more equity in your home than your state allows you to keep. For example, your state of residence allows families to claim a $25,000 homestead exemption. If you have $25,000 or less equity in your home, you can keep your home. If you have more than $25,000 equity in your home, the bankruptcy trustee will sell your home if the sale would net a worthwhile amount of money for your creditors.
The Homestead Exemption
Look at your state’s homestead exemption to determine whether you should file Chapter 7 bankruptcy. If you recently moved from another state, you may need to consider that state’s homestead exemption. The federal bankruptcy code includes a provision that will not allow you to claim the homestead exemption for the state in which you reside if you have not lived in that state for a full two years prior to the date of filing the bankruptcy petition.
Your Home and Chapter 13
If according to your state’s laws, you cannot claim the homestead exemption under Chapter 7 bankruptcy, you have the option of Chapter 13 bankruptcy. In a Chapter 13 bankruptcy case, it does not matter how much equity you have in your home, because you get to keep your home and all of your other property. The bankruptcy trustee does not have to search for money with which to pay your creditors, because you pay your creditors over an extended period of time. A Chapter 13 bankruptcy case entails committing to a debt repayment plan and making monthly payments to the bankruptcy trustee, who distributes money to your creditors over a period of three or five years.
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