Whenever you file for bankruptcy, you may be able to preserve your house, but the conditions must be favorable. You must ensure that you fulfill the standards of the section you are filing. For example, Chapter 7 filers must be regular on payments and use a bankruptcy exemption to safeguard home equity. On the contrary, Chapter 13 filers can make missing mortgage payments while keeping their house.
The following considerations will determine whether you may maintain your house after filing for Chapter 7 bankruptcy:
- if your mortgage payment is up to date
- if you will be willing to proceed paying payments after filing for bankruptcy
- how much equity a homestead exemption may safeguard, and
- the quantity of equity you have in your house
Are your mortgage payments up to date?
If you are behind on your mortgage payments when you apply for Chapter 7, you will likely lose your house. Although the automatic stay will temporarily halt a foreclosure, the best you can expect is a few months of delay.
- Why filing won’t make a default go away: Chapter 7 or Chapter 13 bankruptcy does not allow you to catch up on past-due payments. It is a concern since a mortgage is a secured obligation that cannot be discharged in Chapter 7 or Chapter 13 bankruptcy. After the automatic stay expires, the lender may foreclose, and you will lose your home.
- What happens if you file? The lender will either petition the court to remove the automatic stay to enable foreclosure proceedings to resume (which the court would most likely do if the trustee does not intend to sell the property) or wait until the bankruptcy is through, then proceed with the foreclosure and auction the house.
- Chapter 13 bankruptcy may be beneficial: If you are behind on your payments and want to maintain your house, filing a Chapter 13 lawsuit is a better alternative. In contrast to a Chapter 7 bankruptcy, it includes a provision that permits you to play catch-up on mortgage arrearages over a three- to five-year payback period. Also, if you already have more equity than you could ever preserve with such a homestead exemption (more on that below), you can use the plan to pay your creditors the amount of the non-exempt property.
What happens to your property after you file?
Your property will be placed in a bankruptcy estate controlled either by a Chapter 7 or Chapter 13 bankruptcy trustee assigned to the case when you file for Chapter 7 or Chapter 13. You do not lose everything, however, so that you can “exempt” or withdraw anything that is reasonably required to maintain a house and job. The trustee will sell any remaining assets, and the money will be distributed to your creditors.
What are your options for Home Equity in a Chapter 7 Bankruptcy?
Assume the exemption is insufficient to cover the overall amount of your equity. In that instance, the Chapter 7 court-appointed trustee will liquidate it and use the excess earnings to pay off part of your unsecured debt, such as credit cards and medical expenses.
What are your options for Home Equity in a Chapter 13 Bankruptcy?
Chapter 13 bankruptcy operates differently. You will not be compelled to give up any assets. Rather, you’ll contribute to the non-exempt portion of your plan’s equity. Of course, if you have a lot of non-exempt equity, this may get pricey. You must prove that you have sufficient revenue to pay all the payments specified in your plan.
Can Bankruptcy Exemptions Protect Your Home Equity?
The property that its occupants can defend in bankruptcy is listed in state exemption statutes.
- Residents in some states could choose between the state exemption list and the federal bankruptcy exemption system.
- In any case, almost every state allows residents to safeguard some of their home equity with a landholding exemption.
- With a wildcard exemption, you may be able to exclude even more people explicitly.
- In a Chapter 7 bankruptcy, if your exemptions are sufficient to meet your equity, the trustee will not sell your home.
- If your exemptions only protect a portion of the house, the trustee will sell it, pay off the mortgage, give you the quantity you’re obligated to exempt, and use the remaining sales proceeds to pay creditors.
Can You Continually Make House Payments After Filing for Chapter 7 Bankruptcy?
It’s also critical to ensure that you can pay to maintain paying your mortgage after a Chapter 7 bankruptcy. Losing your home because of your case may put you even worse financial situation.
- Worse still? You’d have had to wait 8 years to file a second Chapter 7 bankruptcy, giving the lender plenty of time to pick up a deficiency balance by topping up charging on your income or a checking account.
- Why? If the lender cannot sell that house for the amount owed, you may be left with a deficiency balance, relying on your state’s laws.
Bankruptcy under Chapter 13 and past-due mortgage payments:
If you are behind on your mortgage payments and want to keep your home, Chapter 13 bankruptcy provides a mechanism to help you catch up, which Chapter 7 bankruptcy does not.
- Make a Repayment Plan: In Chapter 13, you propose a repayment strategy that will help you compensate your creditors over a three to five-year period. You can add your mortgage arrearage to your payment plan as a separate debt.
- Demonstrate that you have a sufficient income: Using the Chapter 13 plan to meet up on your outstanding debts will only work if you have enough income to pay your routine monthly mortgage payment and have a good plan of compensation while in bankruptcy.
- Make a Repayment Plan: In Chapter 13, you propose a repayment strategy that will help you compensate your creditors over a three to five-year period. You can add your mortgage arrearage to your payment plan as a separate debt.
To summarize:
Mortgages, home equity loans, and home equity lines of credit are all examples of secured debts. This indicates that the bank has a vested interest in the property. The house is yours to keep if it makes your monthly mortgage payments. If you fail to make your mortgage payments, the bank may foreclose on your home.
