This is one of the most common questions we receive from those struggling with debt. They’ve heard that bankruptcy can provide a fresh start, but they’ve also heard that a bankruptcy court can take everything you own to repay creditors.
The first of these ideas is true. The second is an exaggeration and overgeneralization.
Whether you lose your house in bankruptcy depends on the following 3 factors:
- The type of bankruptcy you file;
- The homestead exemption and amount of equity you own; and
- Whether you can catch up on mortgage arrears by the end of your case.
Read on for an in-depth explanation of each of these factors, and how they can affect your homeownership during and after bankruptcy.
1. The Type of Bankruptcy You File
Each type of bankruptcy treats the filer’s assets differently. Generally, Chapter 7 poses the greatest level of risk, as you can only benefit from debt discharge after the liquidation process. During this process, the trustee seizes and sells your nonexempt assets to repay your creditors.
Chapter 13 and 11, meanwhile, do not involve liquidation. They involve repayment plans, in which you are given time to repay debt using your disposable income. Chapter 11 can even allow small business owners filing under Subchapter V to modify the mortgage on their primary residence, so long as they took out the mortgage for business purposes.
2. Exemptions and Equity
Even if you file Chapter 7, you might not lose your home through the liquidation process. This is because both federal and state governments have bankruptcy exemption laws that allow you to exempt (protect) a certain level of home equity from liquidation. Florida, in fact, allows you to keep an unlimited amount of equity in your home (with certain exceptions that depend on the size of your property). To claim this exemption, you must have owned your home for no less than 1,215 days before filing bankruptcy.
If you cannot qualify for this exemption, you will need to use the federal exemption, which only allows you to protect $25,150 of home equity.
3. Mortgage Arrears
No matter which type of bankruptcy you file, you will face a legitimate threat of foreclosure if you are not caught up on arrears by the end of the case.
All forms of bankruptcy trigger the automatic stay, which prevents lenders from initiating or continuing foreclosure during the homeowner’s bankruptcy proceeding. Once the case is over, however, the automatic stay is withdrawn, and lenders can initiate foreclosure if you are still behind on payments. Similarly, the government can still seize your home if your case did not remove a tax lien attached to the property.
Thus, you might still lose your home after Chapter 7—even if you successfully protected it from liquidation through a homestead exemption.
If you file Chapter 13, you have 3-5 years (i.e. the duration of your payment plan) to catch up on mortgage arrears. If you continue to make regular monthly payments through the plan AND catch up on delinquent payments by the end of the plan, you can effectively rescue your home from foreclosure. Those who file Chapter 13 generally have the greatest opportunity to keep their homes.
Chapter 11 establishes a similar payment plan, which may give you time to catch up on arrears.
Get a Personalized Assessment from Seasoned Professionals
To obtain a better understanding of the effect that bankruptcy may have on your homeownership, get in touch with our team at The Buchalter Law Group. After 45+ years of practice, we have developed the knowledge and skills needed to thoroughly analyze our clients’ situations and recommend the most appropriate way forward. If your goal is to rescue your home from foreclosure, we can help you implement a plan with the highest possible chance of success.