Is My Home Safe if I File Personal Bankruptcy?
Declaring personal bankruptcy is often considered a last resort for those deeply in debt. Not only does a bankruptcy do lasting damage to a person's credit rating, but it can result in the seizure and sale of a number of assets. However, the debtor's home is often exempted from such action.
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Types
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There are two main types of personal bankruptcy: chapter 7 and chapter 13. Under chapter 7, also known as liquidation bankruptcy, an individual will be forced to sell many of his personal assets, including, potentially his home. Under chapter 13, known as a reorganization bankruptcy, an individual can keep more of his assets, but will be forced to repay more of his debts. It is generally easy to keep a home when declaring chapter 13.
Laws
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Bankruptcy laws are governed by both state and federal statutes. Each state, as well as the federal government has their own laws stating what property can and cannot be exempt from seizure in a bankruptcy. According to the American Bar Association, some states require individuals declaring bankruptcy to abide by federal guidelines for exemptions, while others mandate that individuals follow state guidelines; 15 states offer individuals a choice.
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Home Equity vs. Debt
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Both state and federal laws allow homeowners who have declared bankruptcy to keep a certain amount of equity in their homes. Whether a homeowner can keep a home is determined by how much debt they owe compared to how much equity they have. In states, a certain amount of debt in a home is exempt from collection. The precise size of this exemption varies from state to state.
Effects
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In some states, the size of the exemption is very low, while in others it is very high. In Alaska, for example the homestead exemption is limited to $54,000. This means that if an individual declared bankruptcy and owed $55,000 on his mortgage, creditors would be entitled to only $1000. Whatever the state law is, federal law limits this exemption to $125,000 for houses acquired in the 40 months before filing or if the debtor committed fraud.
Solution
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According to the American Bar Association, whether an individual can keep his house depends on whether he has substantial equity in it compared to his non-exempt debt. Generally, those with an exemption larger than their outstanding debt are able to keep their homes. They are not freed from making mortgage payments, however. If an individual fails to make mortgage payments, he can still lose his home.
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