Can You Lose Your Home in a Bankruptcy?
Bankruptcy is a way for those deeply in debt to stabilize their finances. There are two different types of bankruptcy -- Chapter 7 and Chapter 13. Both allow you to keep your home, but there are conditions in a Chapter 7 that still make foreclosure possible.
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Types of Bankruptcy
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Chapter 7 and 13 bankruptcies both relieve you from debt pressures, but do it in different ways. Chapter 7 bankruptcy discharges all debt in one court action. You may be released from all debts listed in your court filing without required repayment, but your bankruptcy will appear on your credit history for 10 years. Chapter 13 bankruptcy restructures your debt and sets up court-monitored payments over a three- to five-year period. After your payment period is over, you are current with all your creditors. The bankruptcy generally disappears from your credit history seven years after filing, which is between two and four years after your repayment period is over.
Chapter 7 Homestead Exemptions
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Chapter 7 bankruptcies typically require the sale of assets over a certain exemption level to satisfy your debts. Federal bankruptcy laws allow you to have a maximum equity amount, called a homestead exemption, of $125,000 before requiring you to sell your home. However, federal laws allow states to set their own individual homestead exemption. The majority of states have homestead exemptions that are dramatically lower than the federal limit. Some states, such as Alabama, only allow as little as $5,000, while states such as Arizona allow as much as $150,000, as of October 2010. The average homestead exemption is between $30,000 and 50,000 in equity. A few states such as Florida and the District of Columbia do not have limits. Many states have residency limits that determine if you can use a homestead exemption.
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Significance
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Under Chapter 7 bankruptcy, if your equity falls within your state's homestead exemption limit, and you can afford your mortgage payments and continue to pay them, you will be able to keep your home. If you cannot make your payments and cannot come to terms with your lender, you likely will lose your home in foreclosure.
Geography
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The state whose homestead exemption applies to you is the state where you have resided for the previous two years. If you have not resided in any one state for the whole of that period, then your bankruptcy is under the jurisdiction of the state where you have lived for the majority of the previous 180 days. For those whom neither option applies, federal exemptions rule.
Chapter 13
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Chapter 13 does not require you to sell your home, regardless of the amount of equity you have in it. Even if you are having trouble making payments, Chapter 13 bankruptcy can help you develop an affordable repayment plan with your lender and negotiate new loan terms, if necessary. You might be better able to afford your mortgage payments since the rest of your debt payments are lower. However, if you cannot make your restructured payments after bankruptcy, your lender can still foreclose on your home.
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