Television commercials and advertisements inform delinquent borrowers that they can save their homes by filing for personal bankruptcy. But is it true — or just too good to be true? The bankruptcy process is designed to help people keep as much of their property as possible while repaying their debts. An important issue in the bankruptcy process involves what to do with the debtor’s primary residence. In some situations, you can file for bankruptcy and keep your home, especially if it meets the criteria to qualify for “exempt” status. The first step in this process involves deciding whether to file for Chapter 7 or Chapter 13.
Chapter 7: If you file Chapter 7, or liquidation bankruptcy, depending on how much equity you have in your home and the amount of your homestead exemption, you may be able to keep your home. The moment you file for bankruptcy, a bankruptcy estate is created, a trustee is appointed, and the automatic stay is set in place. Almost all of your assets, including your home, become part of the bankruptcy estate. The trustee is authorized and obligated to liquidate your non-exempt assets and distribute the proceeds to pay your unsecured creditors.
A mortgage lender is usually considered a secured creditor that has a lien on your home. The bankruptcy filing does not extinguish that lien (thus “non-exempt”) and must be paid off first if your home is sold. If the balance of your mortgage exceeds the value of your home, then your home has no equity. In other words, after the mortgage lender is paid, there would be no proceeds left to distribute to unsecured creditors. The trustee will most likely not liquidate your home under these circumstances.
If your home has equity, the trustee has the power to sell it to pay your secured creditors unless you can exempt the equity in your home from the bankruptcy estate. This exemption is called a “homestead exemption.” In some cases, if you have more equity than you can exempt, you may still be able to keep your home by using a “wildcard exemption.” The wildcard exemption is added to your homestead exemption to cover the difference between the equity in the home and the value of the homestead exemption. Unfortunately, the wildcard exemption may be reduced significantly in most states if you are using all of your allotted homestead exemption.
When Chapter 7 is completed and you receive a discharge, your personal liability on the mortgage is extinguished but not the lender’s lien. In other words, the mortgage lender cannot come after you personally if you don’t pay your mortgage. However, the lender still has a right to take the house back through foreclosure if you don’t make your mortgage payments. If you wish to keep your home, you should continue making your mortgage payments during and after your bankruptcy.
Chapter 13: Some bankruptcy attorneys advise that Chapter 13 is an effective strategy for aiding people in keeping their homes. Firstly, it gives debtors time to repair their finances, usually three to five years. During the Chapter 13 payment plan, the court agrees to an income-based budget with monthly payments made to the trustee to pay off both the secured and unsecured debt. It is more likely that you will be able to keep your home in Chapter 13 because the trustee will roll the amount of money that you owe your lender into the trustee repayment plan. In order to keep your home during the term of the Chapter 13 plan, you must not only pay the monthly payments on-time but also keep your mortgage payments current. If you fall behind on either, you may lose the home because your automatic stay will be vacated.
Secondly, if you file for bankruptcy and have two mortgages, it is possible to come out of the process with just one mortgage because the second mortgage may not be considered a “secured” debt depending on the circumstances. The first secured lien holder on the home always has priority. The second mortgage holder would only benefit from a bankruptcy settlement if the first lien holder was satisfied in full. If you decide to keep your home and the value of your home has fallen below the balance of your first mortgage, bankruptcy may remove the second mortgage entirely. If your mortgage is higher than the equity in the home, or it would cost less to rent a comparable property, it may not be worth keeping the residence. You are allowed to surrender the property and walk away from it, but you must make that declaration during the bankruptcy. The attorneys at Ayo and Iken can advise you regarding this decision.