The fear of losing a house while filing for bankruptcy is probably the greatest reason why most people who ought to file for bankruptcy don’t. The common assumption is that filing for bankruptcy means that you’ll let go of your house. However, that is hardly the case for both Chapter 7 and Chapter 13 bankruptcy. Many options are available for those who have a house and want to file for bankruptcy, and with guidance from a professional, you will make the right decision. If you are in a state of figuring out if you still want to file for bankruptcy, make sure to understand what to do before filing bankruptcy.
It’s also important to realize that bankruptcies can vary from state to state. For instance, if you file for Chapter 7 bankruptcy in Alabama, it could look slightly different from filing for Chapter 7 bankruptcy in Colorado. Keep this in mind when filing for bankruptcy.
Continue reading this article to learn more about:
- What happens if I file bankruptcy in my house? Most people want to keep their real estate.
- Can you file bankruptcy if you own your home?
- Bankruptcy and keeping a house
How to File Bankruptcy and Keep My House?—Claiming Bankruptcy Exemptions
You can use bankruptcy exemptions when you file for bankruptcy relief—this exemption will protect your equity from being used to pay your debtors.
Bankruptcy exemptions apply to assets such as retirement accounts, government benefits, homes, clothing, a tool of trade, vehicles, and some other personal property.
The Federal Bankruptcy Code gives states the right to have their bankruptcy exemptions. Based on the state of residence where you filed for bankruptcy, you may be required to use the state exemption or make a choice between the state exemption and a federal exemption. Most states have an exemption that is distinctively different from the federal government’s exemption.
For example, Florida’s homestead exemption used to be limited. However, the federal homestead exemption is $25,150 as at the time of writing this article, and joint couples have a federal homestead exemption that is up to $50,300. Federal bankruptcy exemptions are reviewed every three years. The next review is expected to happen on April 1, 2022.
But, how can I use a bankruptcy exemption to protect my asset and my house?
Can I File Bankruptcy and Keep My House and Car?
You may qualify for bankruptcy by being under the income limit for Chapter 7 bankruptcy, but keeping your house or car can be important.
The net equity in your home is calculated by removing the sum of your mortgage pay-off from the sum of all valid liens filed against your house at a fair market value of your home.
For example, if you have a home that’s worth $100,000 and you have an $80,000 mortgage debt, then your net equity on the home is $20,000. As such, since the federal bankruptcy exemption on homes is $25,150, then it means that the federal bankruptcy exemption protects your home. Don’t forget; the homestead exemption will double if both couples have their names on the title of the home file for a bankruptcy discharge.
Your bankruptcy attorney will check through the bankruptcy exemption plan that is most suitable and inform you on which one best covers your equity on the home if your bankruptcy attorney notices that your asset is exposed to any type of risk. In a few cases, you may have to abandon the bankruptcy plan and opt for an alternative to bankruptcy. Keep in mind that a bankruptcy attorney can help you navigate the various requirements that change based on your location. So, if you plan to file for Chapter 7 bankruptcy in Oklahoma, an Oklahoma-based attorney will have the most locationally relevant information for you.
If you’re a senior citizen, and you want to file for bankruptcy, then there are some additional things you can do to enjoy more exemptions. For example, a bankruptcy plan will not affect your retirement income, and retirees have the opportunity to use a homestead exemption.
Why People Lose Their Home When They File Bankruptcy
There are some cases where people have lost their homes in the process of getting a bankruptcy discharge. For example, you won’t get a bankruptcy discharge if you have a secured lien from a mortgage loan on your home’s title. As such, if you can’t afford to pay your mortgage cost, then the bankruptcy trustee may have to sell your home to pay off your creditors.
However, allowing a bankruptcy trustee to liquidate your home is not as negative as many assume. If you’re certain that you can’t afford payments on your home, you should surrender your home to prevent a deficiency judgment. A deficiency judgment is a money you owe when your foreclosure sale is not sufficient to sufficiently clear your debt. In other words, a deficiency can result in you owing the mortgage company more than you borrowed.
Another example of how you can lose your home in bankruptcy is when your bankruptcy exemption does not cover your home. The Chapter 7 bankruptcy trustee has the right to sell the house and use the unprotected equity to settle your unsecured creditors. The trustee pays off the mortgage first, then pays other debtors next.
Will I Lose My House If I File Chapter 13?
If your home’s net equity is higher than the exemption limit, or you’re behind in your bankruptcy plan repayment schedule, then you can file for a Chapter 13 bankruptcy to save your house.
A Chapter 13 bankruptcy will re-organize your loan such that you’ll be required to pay a part of your loan. Your bankruptcy plan can allow you to keep your house by including your mortgage as a part of the plan. Also, if your homestead exemption is higher than the maximum bankruptcy exemption allowed for your state, then you’ll be required to pay an additional amount to unsecured creditors. You may just need to pay a little extra to keep your home. If you stop meeting up with your financial obligations to the Chapter 13 bankruptcy plan, then the stay will be lifted, and your creditors will make efforts to recover their debt. In addition to everything, it is important to understand that there are rules depending on where you are in the country. Filing bankruptcy in Nevada, filing bankruptcy in Virginia, or filing bankruptcy in Louisiana is going to have similar but yet also different rules because of the different states.
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