If after careful research you determine that Chapter 7 bankruptcy is the right choice for your circumstances, you may be wondering if it’s possible to wipe away credit card debt and other unsecured loans, but hang on to your house. The short answer is *it depends*. If you’re current on your mortgage and there is not much equity in your home, it is likely that you can keep your house. However, the opposite may be true if there is significant equity in the home, or if you are behind on your mortgage payments. Read on for more information about how filing Chapter 7 bankruptcy might affect your mortgage and property rights.
Written by Amy Carst.
Updated July 22, 2020
If you are struggling to pay your bills and don’t see an end in sight, there are many debt relief options available to you. From debt consolidation and settlement to bankruptcy, the best solution for your unique needs is dependent on multiple factors. When bankruptcy seems the only viable path to financial freedom, you must then decide which type of bankruptcy aligns with your current situation and goals.
If after careful research you determine that Chapter 7 bankruptcy is the right choice for your circumstances, you may be wondering if it’s possible to wipe away credit card debt and other unsecured loans, but hang on to your house. The short answer is it depends. If you are current on your mortgage and there is not much equity in your home, it is likely that you can keep your house. However, the opposite may be true if there is significant equity in the home, or if you are behind on your mortgage payments.
Read on for more information about how filing Chapter 7 bankruptcy might affect your mortgage and property rights.
Scenario 1: You own the house free and clear
To determine how Chapter 7 bankruptcy will affect your ability to keep your home, it’s important to first examine your status with the mortgage company, as well as to account for any equity. If you own the house free and clear, which means there is no outstanding mortgage or home equity loan, and no liens whatsoever against the property, the bankruptcy trustee may be able to sell your home to pay off unsecured creditors. Fortunately, there are some bankruptcy exemptions when it comes to real property used as a home.
Most states have a homestead exemption that can be used to protect your property, to a certain extent. In some states, you can protect your home up to a certain dollar amount, while other states also impose a limit on the number of acres eligible for protection. Depending on your state of residence, the exemption amount could range from a few thousand dollars to up to $500,000, or even the entire market value of the real estate.
There is also a federal homestead exemption. However, you will only claim this exemption if your state doesn’t allow you to claim residency, or if you are permitted to choose between state and federal exemptions, and the federal exemption happens to be greater.
To determine if the equity in your home is protected by the homestead exemption, subtract your state’s exemptions from your property’s fair market value. Let’s say the home is worth $100,000 and the homestead exemption is $80,000. In this scenario, you will have $20,000 of unprotected equity in your home. From that amount, you will then subtract the trustee’s commission and the cost to sell the home. If after all of these deductions you wind up with a negative number, it means that the amount of equity is insufficient to trigger a sale, and there won’t be any incentive for the bankruptcy trustee to sell your home. In short, your home is probably safe. It is important to note that your homestead exemption can only be applied to one property.
All that being said, without any mortgage or liens on your property, it is very possible that the calculations above will result in a positive number. In this case, the bankruptcy trustee may decide to use the equity to pay off your unsecured creditors. To do this, the trustee will likely sell the home, give you the dollar amount of the homestead exemption, and pay off creditors with the remaining funds. So, if you own your home free and clear, filing a bankruptcy may not be the best path towards lasting debt relief.
Scenario 2: You’re still paying on your mortgage
If you are still paying on your mortgage and/or you have other liens against the property, home equity may still come into play. If there is significant equity in the home, it is possible that state or federal exemptions won’t be enough to protect it. You can use the same calculations as above to determine whether or not your home is at risk. Subtract your homestead exemption from any equity. If the resulting number is positive, next subtract the trustee’s fee and the average cost to sell. If after all of these deductions, you still have a positive dollar amount, your home may be at risk. If, however, there is no remaining equity, you will likely be able to keep your home. But there are a few other factors to consider.
The main consideration, once you’ve determined that equity isn’t sufficient to trigger a sale of your property, is whether or not you are up to date on your mortgage payments. In order to file Chapter 7 bankruptcy and keep your home, you must be current on your mortgage, or be able to bring it current shortly after filing. Otherwise, you may lose the home to foreclosure. Chapter 7 can provide a temporary pause in foreclosure proceedings, but it won’t allow you much time to pay off arrears to stop foreclosure altogether.
If you wish to file Chapter 7 bankruptcy and keep a property for which you have fallen behind on monthly payments, you may be able to negotiate with your mortgage company before filing. If your lender agrees to modify your loan or refinance to resolve arrears, you can bring the mortgage debt current. However, it is essential to complete this before filing, as bankruptcy proceedings could disrupt the loan modification or refinancing process.
If your lender does not agree to resolve the back mortgage payments, pre-bankruptcy, you may wish to consider filing Chapter 13 bankruptcy instead. In Chapter 13, debts are reorganized into a three-to-five year repayment plan, and mortgage arrears can be included in this plan. But in order to qualify for a Chapter 13 bankruptcy, you will need to show that you have sufficient monthly income to afford the plan payments. Furthermore, excessive unsecured debts, such as student loans and medical bills, may make you ineligible for Chapter 13. But there is a solution.
Debtors who have too much unsecured debt, but who wish to file Chapter 13, can first file Chapter 7 to wipe out debts with unsecured creditors. As soon as this has been accomplished, they can file Chapter 13, creating a repayment plan for remaining debt. This process is known as Chapter 20 (Chapter 7 + Chapter 13 = Chapter 20).
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Upsolve provides educational resources to help low-income debtors determine which type of bankruptcy is best for their unique needs. If you choose to file Chapter 7 and you don’t own a home, Upsolve even has a web app that allows you to do this on your own, entirely for free. However, if you wish to file bankruptcy and keep a home, it is in your best interest to first obtain a free evaluation and legal advice from an experienced bankruptcy attorney. Professional help from a law firm that specializes in bankruptcy case law can be invaluable. A skilled bankruptcy lawyer will place significant importance on the attorney-client relationship, working diligently to ensure that any strategies align with your goals. It’s time to work toward the fresh start you deserve.