Can Bankruptcy Take Your House?

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Written by Jonathan Petts, Esq.  
Updated May 29, 2020

Summary

A serious fear that many people have when they file for bankruptcy relief is losing their home. Sadly, losing a home may prevent some people from seeking legal advice about bankruptcy relief. Let’s look at some factors that address the fear that bankruptcy takes homes.

A serious fear that many people have when they file for bankruptcy relief is losing their home. Sadly, losing a home may prevent some people from seeking legal advice about bankruptcy relief. Let’s look at some factors that address the fear that bankruptcy takes homes.

Filing a bankruptcy case is an extremely effective way to get rid of the debt you cannot pay. In most cases, a person who files for debt relief under Chapter 7 keeps their home if they can afford the payments and they get rid of other debts. Therefore, the fear that you might lose your house during bankruptcy may not apply in your case.

For debtors who do not keep their home, they often find that giving up their home is the beginning of a fresh start and a journey toward a new home. Therefore, for these people, the fact that a bankruptcy takes their home may be a good thing.

If you are worried that you will lose your house during bankruptcy, this article gives you a look at your debt relief options under bankruptcy a bit closer.

Your Home and Chapter 13 Bankruptcy

Many people choose Chapter 13 if they are worried bankruptcy takes homes. If you are worried that you will lose your house during bankruptcy, you may want to discuss Chapter 13 with a bankruptcy attorney.

Chapter 13 bankruptcy case allows you to pay a portion of your debts through a repayment plan. You must file a proposed repayment plan and serve the plan on all your creditors. A Chapter 13 trustee is appointed to manage your bankruptcy case. The Chapter 13 trustee and your creditors can object to your bankruptcy plan.

In many Chapter 13 plans, the trustee requests an increase in the proposed monthly payment. Your Chapter 13 bankruptcy attorney negotiates with the trustee to obtain a payment that the court can approve. The negotiation helps reduce the chance you will lose your house during bankruptcy.

If you are facing foreclosure or you are behind on your house payments, a Chapter 13 bankruptcy can help you keep your home.

In your Chapter 13 repayment plan, you pay your past due mortgage payments a little each month. You begin making your regular mortgage payments directly to the mortgage company. Because you can pay the past due mortgage payments over time, you can keep your home. You don’t have to worry about whether you lose your house during bankruptcy if you can afford to keep up the payments after you file your Chapter 13 case.

However, you need to have sufficient income to fund a Chapter 13 plan or you could lose your house during bankruptcy. In addition to your house payments, your repayment plan includes amounts for other creditors.

For example, you must pay a certain amount to your unsecured creditors. Unsecured debts include credit cards, medical bills, personal loans, payday advances, and most judgment debts.

To keep your home, you must be able to pay your Chapter 13 plan payment and your regular house payment. If you have a vehicle, that payment is usually included in your Chapter 13 repayment plan.

What If I Cannot Afford a Chapter 13 Plan Payment? Does Bankruptcy Take My Home?

When you look at other bankruptcy options, you may worry about whether you may lose your house during bankruptcy or if bankruptcy takes your home. Let’s look at another bankruptcy option to see if you lose your house during bankruptcy in that type of bankruptcy case.

If you cannot afford to file a Chapter 13 bankruptcy case, you may qualify to file under Chapter 7. Chapter 7 is designed for debtors who cannot afford to pay their debts and need help getting back on their feet. You must meet income requirements to file a Chapter 7 case. You must also take additional steps to prevent losing your house during bankruptcy in Chapter 7.

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Your Home and Chapter 7 Bankruptcy

In a Chapter 7 case, you do not have a repayment plan. Therefore, you do not have three to five years to catch up house payments to avoid losing your house during bankruptcy if you file under Chapter 7. Unsecured debts that are eligible for a discharge are wiped out when you receive your bankruptcy discharge.

Unsecured creditors are owed money but do not have collateral for their debt. For example, a credit card debt or a medical debt is unsecured debt because the company does not hold the title to any of your property. A secured creditor holds a lien on your property so it can take the property if you do not pay the debt, like a mortgage on your home or a loan to purchase a vehicle.

Chapter 7 case gets rid of most unsecured debts, but it does not give you time to catch up your mortgage payments.

If you cannot pay the past due mortgage payments before the Chapter 7 case is closed, the mortgage company will continue collection efforts after the Chapter 7 case is closed. In some cases, the mortgage lender may ask the bankruptcy court for approval to resume a foreclosure action before the Chapter 7 case is closed. In that way, bankruptcy takes your home if you cannot afford the payments.

What Happens to My Home in Chapter 7 If I am Not Behind on Mortgage Payments?

If you are not behind on your loan payments, you can file for a Chapter 7 to get rid of the rest of the debts you cannot pay. In most cases, debtors keep their houses when they file Chapter 7 and so bankruptcy takes nothing away but your debts. It is bankruptcy myth that bankruptcy takes homes from everyone who files Chapter 7.

When you file bankruptcy under any chapter, you choose bankruptcy exemptions to safeguard the equity in your property, including your home. The exemptions can prevent you from losing your house during bankruptcy.

Depending on your state’s laws, you may have a choice between federal bankruptcy exemptions and state bankruptcy exemptions. You choose based on which option lets you keep the most property or the property that is most important to you. By doing so, you may be able to prevent a situation in which bankruptcy takes your home.

What is Equity in Property?

Equity is the value you own in a piece of property. Equity is the money that bankruptcy takes to pay creditors in some bankruptcy cases.

Equity is equal to the difference between the fair market price and any liens on the property. For example, if your house is worth $100,000 and you owe $80,000 to the mortgage company, the equity in your home is $20,000 ($100,000 -$80,000 = $20,000).

A homestead exemption protects the equity in the home. Without bankruptcy exemptions, bankruptcy takes certain property when a person files for bankruptcy relief. When you claim a homestead exemption, you are protecting the equity in your home from your unsecured creditors and the bankruptcy trustee. In other words, exemptions help you if you are worried about losing your house during bankruptcy.

As of April 1, 2019, the federal homestead exemption is $25,150 for a single debtor. If you are married, you can double the exemption for a total of $50,300. The federal bankruptcy exemptions are periodically adjusted. The next adjustment will be in 2022.

Some states require bankruptcy debts to use state bankruptcy exemptions. The homestead exemptions vary by state. For example, Texas has an unlimited homestead exemption if the property meets certain qualifications. Therefore, many people in Texas do not need to worry about whether bankruptcy takes homes. However, other states limit the homestead exemption.

What Happens if Bankruptcy Exemptions Do Not Cover All Equity in a Home?

If the bankruptcy exemption covers the equity in your home, the Chapter 7 trustee should not pursue selling your home. You should not need to worry about losing your house during bankruptcy if the exemptions cover all equity in the home. A Chapter 7 trustee only takes property that the trustee can sell to use the money to pay unsecured creditors.

For example, if your house is worth $200,000 with an $80,000 mortgage, the equity is $120,000. If you were using federal exemptions, the trustee might sell the home, pay you the exemption amount, and use the rest of the money to pay toward your unsecured debts.

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Why Should I File Chapter 7 If I Am Giving Up My Home?

If bankruptcy takes my home, why is Chapter 7 good for me?

Some individuals do not think they need to file Chapter 7 if they are giving up their home. However, filing a Chapter 7 bankruptcy case has many benefits. Some of the benefits of filing for debt relief under Chapter 7 include:

  • No Deficiency Judgment

When a lender forecloses on a home, it can request a deficiency judgment. A deficiency judgment is a lien against you for any money owed to the lender that is not paid by the sale of the home.

When you file Chapter 7 and surrender the home, the lender does not receive a deficiency judgment. If you have a deficiency judgment now, filing Chapter 7 will get rid of it.

  • Get Rid of Other Debts

Filing Chapter 7 gets rid of most, if not all, your unsecured debts. That means you can get rid of credit card debt, medical bills, old rent payments, some old income tax debt, old utility bills, payday advance loans, and most personal loans.

Some debts cannot be erased in bankruptcy, including most tax debt, student loans, alimony, child support, and other debts owed to the government.

  • Write-Off Debts Do Not Trigger Income Tax

If you negotiate with your lenders to pay a portion of what you owe and write off the rest of the debt, the creditor must report the portion of the bad debt written-off to the IRS. When you file your tax return, the debt is reported and may increase the amount of taxes you owe.

When you file Chapter 7, debts that are wiped out do not trigger income taxes. You can get rid of the unsecured debts without pay any money to the creditors and do not need to worry about write-offs increase your tax debt.

  • Keep Your Property

Most Chapter 7 cases filed in the United States are no-asset cases. A no-asset case is a Chapter case in which the debtor keeps all his or her property.

Even if you have a small amount of equity in your property, the Chapter 7 trustee usually will not take property that has less than $500 worth of equity. The cost of liquidating the property is too high compared to the money received for the unsecured creditors when there is not much equity in the property.

  • Stop Wage Garnishments

Filing Chapter 7 stops wage garnishments. If a creditor is taking money out of your paycheck, you can stop the garnishments if the debt is dischargeable in Chapter 7.

  • Chapter 7 is Quick

A typical no-asset Chapter 7 case is finished within four to six months from the date of filing the bankruptcy forms. You could be debt-free and on the road to a better financial well-being in less than six months after you file your Chapter 7 Petition.

  • You Can File Chapter 7 Without An Attorney

Depending on your situation, you may not need to hire an attorney to file Chapter 7. If you can afford to hire a bankruptcy attorney, that is great. A bankruptcy attorney knows the law and has the resources to complete bankruptcy forms quickly. Bankruptcy lawyers provide a great service for people who need debt relief services.

However, what happens when someone does not have the money to pay a bankruptcy attorney? Does that mean that they cannot receive the same benefit of filing a bankruptcy case?

Yes, you can receive the same benefits of filing Chapter 7 that other people do who can afford to hire a bankruptcy attorney. You can file a Chapter 7 bankruptcy case without an attorney to get out of debt, and we might be able to help.

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Free Bankruptcy Assistance for Low-Income Individuals

Upsolve is a non-profit company that works with low-income individuals who need to file Chapter 7 but cannot afford to pay a bankruptcy attorney to help them. We do not provide legal advice, but we do provide the resources, bankruptcy forms, and information you need to file your own case.

If you do not own a home, you might want to try Upsolve. If you do own your home, you may want to reach out to legal aid or a bankruptcy attorney for advice about how to prevent losing your house during bankruptcy.

Filing a Chapter 7 bankruptcy case may seem overwhelming. Watch videos made by some of our past users to see how Upsolve helped them when they needed debt relief. If you still have questions, contact our office. We are here to help you get the fresh start you deserve.

Click here to begin Upsolve’s free bankruptcy screening tool to find out if you're able to use our free web app to help you file Chapter 7 bankruptcy without an attorney. It will only take a few minutes and - if you don't qualify for our app - we can help you find a lawyer.

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Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

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