Filing for bankruptcy is always a difficult step to take. When you and your family decide to make that move, however, you may be able to do it without losing your home, and keeping a bit of stability in your family life at a turbulent time. If you're filing for bankruptcy when you own a home and you want your family to stay in that home, you’re probably wondering how you can preserve your home and still find a way to get rid of the overwhelming debt that is prompting you to file for bankruptcy.
Bankruptcy and House Ownership
Bankruptcy is meant to be a path to eliminate crushing debt, albeit a serious one. It’s not meant to prevent you and your family from achieving a stable financial future. If you're thinking "If I file for bankruptcy, what happens to my house?," you do have options. If you take the right steps, and still have some income, you may be able to keep your house. Bankruptcy is designed to give people a fresh start, not put them on the path to poverty. In fact, many people who declare bankruptcy can keep their house throughout the process; but some cannot.
If you are up-to-date on your house payments, you can file a Chapter 7 bankruptcy. The rules for filing Chapter 7 are much more strict, and the exemptions much lower and less flexible. You’ll need to be able to protect your equity with a bankruptcy exemption. You must be able to continue making your house payments throughout the bankruptcy procedure.
If you are behind on your house payments, along with your other bills, but you think you can catch up on your mortgage, then filing a Chapter 13 bankruptcy may be the way to go.
What Is Exempted From Bankruptcy?
Bankruptcy provides for exemptions that allow you to live your life. So furniture, clothing, medical equipment, an inexpensive car and anything you need that enables you to work are exempted from being taken from you in a bankruptcy proceeding. This may include housing, which will allow you to exempt some equity in a home. Equity is the market value of your home minus the balance on your mortgage and home equity loan. If you have little equity in your home, or you owe more than your home is worth, your house doesn’t need to be sold to pay off your debts. Your 401(k) or other retirement plan is also protected, although there is a cap of about $1.3 million for a traditional or Roth IRA.
Bankruptcy law varies by state. Your state may insist that you use state exemptions, or it may allow you to use state or federal exemptions. Most states exempt clothing, furniture, other necessities, items you need to work, housing and transportation. But the amounts of exemption can vary by state, sometimes considerably. This may determine whether you can keep your house. In some states, you are allowed to exempt all the equity in your home, while in other states, you are limited as to the amount of equity in your home you can exempt. Make sure you know what the exemption ceiling is before going into your bankruptcy filing. If you’re fortunate enough to live in a state with a homestead exemption, that exempts the equity in your home from repossession.
Chapter 7 Bankruptcy
For those filing for Chapter 7 bankruptcy, the court will appoint a bankruptcy trustee. That trustee will collect property that is not exempt, sell the property and distribute it to your creditors.
So if you’re trying to keep your home, but you don’t meet the equity requirement, you may, in essence, trade other assets for the equity in your home. If you can’t do this, unfortunately, you may lose your house in the bankruptcy proceedings. Chapter 7 is the most common type of bankruptcy proceeding.
For example, if the exemption amount for a house in a state is $100,000 and you have $50,000 equity in your house, your house would not be taken. With enough income, you will be able to work out a payment plan. But if you have $125,000 in home equity, your house could be sold at auction to pay part of your debt.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy proceedings are complicated, but if your goal is to save your house, and if you have that extra equity in your house that puts you beyond the equity exemption, this is the best way to go. In a Chapter 13 bankruptcy, bankruptcy and house ownership are not mutually exclusive. You are likely to keep your home, as long as you don’t have large, non-exempt equity. You’ll be making monthly payments to a trustee over three-to-five years. If your home equity is higher than the exemption amount in your state, you’ll have to pay for any of this equity you keep, in addition to paying the other fees you owe the trustee. You may be able to do this by selling off your other assets.
If you’ve missed payments and take this route to bankruptcy, you can try to work out a repayment schedule with your creditors, which include your past due payments. To do this, you must have the income or be in a position to make your mortgage payments on time throughout the process.
Although this may be hard, if you can make all your regular monthly mortgage payments and your Chapter 13 payments, you will be current on your mortgage at the end of your repayment plan. When filing Chapter 13 bankruptcy, you probably should get the advice of an attorney. Check and see if you qualify for legal assistance from your local government or a nonprofit, which will help you as you seek to save your home.
Make Your Payments
If you are determined to keep your house, then you must make your payments. When you bought your house and signed your mortgage loan papers, you promised to use your house as collateral in a security agreement. This agreement allows the bank to sell your house at auction as a foreclosure if you renege on your payments. If you can make your payments and emerge from bankruptcy with your house, it's prudent to wait for up to 10 years, until your credit report is free of your bankruptcy declaration, before seeking a new mortgage.
Can You Afford Your Mortgage?
When you emerge from bankruptcy, you should carefully consider whether you can afford the mortgage payments on your house. If the mortgage payments are more than your income can sustain long-term, you don’t want to risk a foreclosure. However, best case scenario, if you have freed yourself from other debts that led to the bankruptcy, you may be able to afford your mortgage.
On the other hand, if you cannot comfortably afford the mortgage payments, you may be able to work something out with the lender. The lender may be willing to consider a short sale or may be willing to work with you to restructure your payments. If you can sell the house, you may want to consider renting for a while if you are unable to qualify for another mortgage. You will have time to rebuild your finances and your credit rating if you can live within your means.
Karen Gardner is a former feature editor and writer and is now a freelance writer. She looks forward to doing her family's taxes each year, and likes to write about home finances and money subjects for the rest of us.