if i file bankruptcy what happens to my house

If I File Bankruptcy What Happens to My House? 

Homeownership is something many strive for and is a common part of the ‘American Dream’. One of the biggest fears homeowners have when filing for bankruptcy is losing their house that they have worked so hard to call their own. 

However, you shouldn’t let this fear of losing your house stop you from gaining debt relief. This is especially the case if paying your unsecured creditors is putting you at risk of not paying your home mortgage. 

In this article, we’re breaking down your fears and highlighting how you can keep your house or equity in your home when you file bankruptcy. Let’s dive in! 

It’s important to note that the information on this website might be classified as a lawyer referral service in some states. However, this information isn’t categorized as legal advice, and it does not constitute a lawyer referral service. Additionally, no attorney-client or confidential relationship is formed when using this site. 

Can I Lose My House in Bankruptcy? 

Filing a bankruptcy case is an effective method of getting rid of debt that you can’t pay. Doing this can make it easier to stay on top of your mortgage payments and keep your equity in your home, not the other way around. 

How Can Filing Bankruptcy Make Paying a Mortgage Easier? 

When you file for bankruptcy, the discharge that you receive after your petition has been granted wipes away most of (if not all) of your unsecured debts. These generally include loan payments, credit card debt, and medical bills. The accumulated bills that are making it difficult to make ends meet right now are eliminated when you make a bankruptcy filing. 

With these debt repayment obligations being wiped away, you have the opportunity to focus on the expenses that matter most. These might include utilities, mortgage payments, and regular living expenses. This is also the case if you’re renting. Rent constantly needs to be paid, like electricity, mortgage, water, and other utilities. However, your past rent payments get wiped away during this petition, so you can focus on your current rent expenses. 

What Happens to Your Mortgage Payments When You File Bankruptcy? 

Home loans, such as home equity loans, mortgages, or home equity lines of credit are classified as secured debts. Meaning, the bank has a form of ownership interest in this real estate. Hence, the home is yours to keep as long as you continue making your monthly payments. 

The Bank Can Take Your Home

However, the bank can take this property back through foreclosure if you don’t pay your mortgage. This is true even when you get a bankruptcy discharge. That’s why you need to keep paying your mortgage if you want to keep your home. 

Chapter 7 Bankruptcy and Your Mortgage 

Chapter 7 bankruptcy is known as being one of the fastest ways of receiving debt relief. In this form of bankruptcy, there isn’t any payment plan associated with any of these debts. Additionally, the filer generally keeps all of their personal property when applying the legal bankruptcy exemptions to their property. 

What Does That Mean for Filers? 

If a filer is on top of their mortgage payments, the ownership of this property basically remains the same when these individuals receive a bankruptcy discharge. The filer is required to continue making mortgage payments until this home is paid off. 

However, there are some legal nuances surrounding bankruptcy. Some of these legal nuances include the discharge of personal liability on a home loan, and how it protects the filer if they lose their real estate later down the line. 

Nonetheless, the most crucial takeaway here is that you can keep your home after filing for Chapter 7 bankruptcy if you have enough income to continue paying your mortgage lender. Yet, it becomes more complex if your property is worth more than what you owe on your mortgage. In these instances, you might have to consult your trustee. 

What If You’re Behind on Your Mortgage? 

If you are behind on your mortgage payments, you have varied options depending on what outcome you wish to gain. Here’s what you should do for each instance: 

  • If you don’t want to keep this property, Chapter 7 bankruptcy offers a mechanism where you can surrender your home to the bank and discharge your mortgage obligation. This protects you if this mortgage is a ‘recourse’ loan where the bank can try to collect a deficiency judgment after foreclosure. 
  • If you want to keep this property, Chapter 7 bankruptcy isn’t an ideal option. This is because it doesn’t offer a way for filers to catch up on their mortgage payments if they’re behind. Hence, individuals remain at the mercy of the bank and the lender’s willingness to modify the home loan to deal with the debtor’s arrearage. If you wish to keep your home and can afford to make your mortgage payments now, filing for Chapter 13 bankruptcy might be the best option. 

Can You Keep Your House After Filing for Chapter 13 Bankruptcy? 

The bottom line when filing for Chapter 13 bankruptcy is that you can keep your home as long as you have sufficient income to keep up with your mortgage. When filing for Chapter 13 bankruptcy, you’re required to fulfill a repayment plan that can either last for three or five years. 

Like when you file for Chapter 7 bankruptcy, your long-term secured debts remain in place with Chapter 13. Hence, you’re required to make regular home mortgage payments after you file for Chapter 13 bankruptcy. If you’re current with your mortgage, everything typically remains the same. However, this isn’t the case if you’re behind on these payments when filing for Chapter 13. 

What If You’re Behind on Your Monthly Mortgage? 

Yes, we did mention above that filing for Chapter 13 bankruptcy can help filers catch up on their mortgage. A repayment plan is included when you file for Chapter 13 bankruptcy, allowing you to catch up on missed payments. Additionally, you might have a few methods (related to your state of residence) to save your property from foreclosure when filing for Chapter 13. Here are two of the available options:

Catching Up

You can save your home from foreclosure when you fulfill the repayment plan of your unsecured debt when filing for Chapter 13. Typically, it takes between three and five years to pay off these debts, which means that you also have up to five years to catch up on any missed payments on your mortgage. 

However, you should have enough monthly income to afford to pay your Chapter 13 bankruptcy repayments (to catch up with your home loan) and your regular monthly mortgage moving forward. 

Mortgage Modification 

Many bankruptcy courts have included a mortgage modification mediation program when you apply for Chapter 13. This is used to help homeowners who are going through Chapter 13 bankruptcy. The program can’t force your lender to do anything that it isn’t already doing. However, it can (and does) streamline the process. 

One of the best features of this court-provided program is that you don’t need to mail, FedEx, email, or fax documents to your lender’s modification department only for no resolution to come from your efforts. 

Bankruptcy is Now Streamlined

With this mediation program, you’re still required to submit certain information and documents. However, everything is managed through an online portal that all participants need to use. Once you have submitted this paperwork, the lender can review everything to determine if you meet the necessary criteria for any of the modification programs offered. 

If you don’t match the criteria of these modification programs, mediation can be scheduled. At this time, you, with the help of a mediator, can identify why you don’t meet these qualifications and what you can do to change the outcome of this. 

Final Thoughts on Filing for Chapter 13 

When it comes to choosing Chapter 13, it’s vital to understand that it’s a long-term commitment. You have the opportunity to accomplish much with it. However, you can only reap these benefits if you set realistic goals. 

Going through the ups and downs of Chapter 13 can be challenging if you’re paying a mortgage that you can’t afford. This is especially the case if you qualify for a fresh start when filing for Chapter 7 bankruptcy. 

Sometimes saving your home can push you to choose this form of bankruptcy. If this is the case (and the only reason you aren’t selecting Chapter 7 bankruptcy), you should remember that it’s a marathon and not a sprint. 

What Do You Lose When You File Bankruptcy? 

In most instances, bankruptcy filers don’t lose anything. Any property that you own free and clear is yours to keep. Mostly, you get debt relief when filing for bankruptcy rather than losing your property. However, this is only if you apply a bankruptcy exemption to protect your belongings. Additionally, any property that gives a lender the right to payment of this secured debt, such as mortgage installments and car loans, is yours to keep if you’re paying this debt. In such cases, your trustee doesn’t necessarily need to get involved in these issues. 

Can a Bankruptcy Trustee Take Your Home? 

Although it isn’t common, it is possible in certain circumstances. The role of a bankruptcy trustee is to sell any non-exempt property for the benefit of any unsecured creditors owed money being discharged in such bankruptcy. This includes real property and personal property. Whether your house is safe from being sold during bankruptcy depends on if this property has any ‘nonexempt equity.’ In turn, this depends on its market value. 

Home Market Equity Matters

If the market value equity in your home is larger than the homestead exemption amount available to claim, the Bankruptcy Code empowers the trustee to sell this equity to pay any unsecured creditors. The amount of homestead exemption claimable is related to your state, despite Bankruptcy Code falling under federal law. This is because these exemptions mainly align with state law. 

You can find out if you have any non-exempt home equity if you subtract the balance of your mortgage and the homestead exemption from the value of your property. The amount of equity that isn’t covered by this homestead exemption is available for the trustee to sell. 

State Bankruptcy Homestead Exemptions 

Bankruptcy Code falls under federal law but it allows states to enact its own exemptions. Depending on where the individual files for Chapter 7 or Chapter 13 bankruptcy, that filer might be required to use these state bankruptcy exemptions. Otherwise, they can choose between federal or state bankruptcy exemptions. 

Federal Bankruptcy Homestead Exemptions 

As we mentioned above, the protections offered by federal and state bankruptcy exemptions are different. An example could be that the homestead exemption under Florida state is unlimited in many cases. Meaning, your home may be protected no matter what its equity amounts to. 

However, the current homestead exemption under federal law is $25,150. Moreover, couples who file a joint bankruptcy and are both on the home’s title might double this federal homestead exemption, which would protect this property up to $50,300 of equity in their home. 

Some States are Different

It’s vital to note that federal bankruptcy exemptions are subject to adjustment every three years. Additionally, some states allow filers to choose federal bankruptcy homestead exemptions. These states include: 

  • Alaska 
  • Arkansas 
  • Connecticut
  • The District of Columbia 
  • Hawaii
  • Kentucky
  • Massachusetts
  • Michigan
  • Minnesota 
  • New Hampshire 
  • New Jersey 
  • New Mexico 
  • New York 
  • Oregon 
  • Pennsylvania
  • Rhode Island 
  • Texas 
  • Vermont 
  • Washington 
  • Wisconsin 

Why Should You File Chapter 7 If You’re Giving Up Your Home? 

You might find it pointless to file bankruptcy if you’re already planning on giving up your home. However, this can be a necessary step to take, especially if you’re still drowning in debt even after foreclosing on this property. You might be wondering if a bankruptcy filing even makes sense if your lender is going to foreclose anyway. However, many benefits come with filing bankruptcy, even if you aren’t hanging on to a house with an expensive mortgage. Some of these advantages that come with filing bankruptcy include: 

You Can Get Rid of Other Debts

When you file bankruptcy, Chapter 7 gets rid of most (if not all) unsecured debts. Meaning, your medical bills, credit card debt, previous rent payments, many personal loans, payday advanced loans, and outdated income tax debt are wiped away when filing bankruptcy. Hence, you can get debt relief when you file for bankruptcy, even if you don’t plan to pay your mortgage or keep your home equity. It’s also vital to note that it’s permitted in all states to get debt relief when you file for bankruptcy. 

No Deficiency Judgment

A lender can request a deficiency judgment when they foreclose on a home. However, when you file for bankruptcy and surrender your home, the lender can’t receive a deficiency judgment. Additionally, if they already have a deficiency judgment against you, Chapter 7 can get rid of this. 

When Should You Talk to a Bankruptcy Lawyer? 

Bankruptcy Code can become extremely complicated. This is especially when it comes to saving your house while filing for bankruptcy. Understanding the various exemptions that you can apply to your home equity can help you ensure your bankruptcy trustee doesn’t sell your house to pay your unsecured creditors. However, failing to correctly exempt your property is known as bankruptcy fraud, which is subject to $250,000, 20 years in jail, or both if you’re found guilty. You can avoid this from happening if you talk to a bankruptcy attorney. 

Lawyers have the Expertise You are Seeking

Moreover, these professionals have the expertise to effectively handle your case. You might be struggling to pick between Chapter 7 or Chapter 13 bankruptcy. Your attorney can help you weigh your options and find the best choice. Additionally, this bankruptcy lawyer is equipped to manage any mediation that might arise when trying to save your house. This is especially helpful if you’re behind on these secured loan payments. 

Let’s break down what you can expect to receive when you hire a bankruptcy lawyer: 

  • Possibly the most vital starting point is that your attorney can tell you if filing for bankruptcy would be the best option. 
  • After identifying if you should file, your lawyer can help you understand if Chapter 7 or Chapter 13 could be the right choice to achieve your financial goals. 
  • This lawyer should have the experience to tell you what you can expect during the bankruptcy process and whether your case involves any specific risks or difficulties. 

Although these are all great resources to have, a bankruptcy lawyer is mostly needed when it comes to advising you on how you can ensure your house remains in your possession during this bankruptcy process. 

Lenders are likely to take a bankruptcy lawyer more seriously when dealing with a mortgage modification or mediation meeting after filing for Chapter 13. Overall, legal advice in a bankruptcy case is always a good idea, especially if you want to save your home from foreclosure. 

Wrapping It Up 

Whether bankruptcy is the best decision for you depends on an array of factors. However, the fact that you own property doesn’t have to be one of the reasons you avoid gaining this debt relief. If the amount of equity making up your property is protected through homestead exemptions in your bankruptcy filing, this ‘fresh start’ might make paying your mortgage more manageable. Hence, improving your overall financial situation. 

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