Options for Families on Filing Bankruptcy When You Own a Home
The most viable alternative for a family to claim bankruptcy and still retain their home is a Chapter 13 Bankruptcy. A Chapter 13 bankruptcy can give a family a fresh start by reducing their unsecured debt payments and enabling them to retain their home. A Chapter 7 Bankruptcy is another alternative, but can be more difficult to file and keep the home. Finally, sometimes the best option for a family filing bankruptcy, is to walk away from the home.
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Chapter 7 Bankruptcy
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A Chapter 7 Bankruptcy is considered a "liquidation" bankruptcy. Normally, any assets owned by the family filing for a Chapter 7 bankruptcy are liquidated to pay back the debts owed by the family. However, a family can file for an "exemption" for the home so that it is not included in the chapter 7 bankruptcy. In order to gain that exemption there has to be very little to no equity in the home. Chapter 7 bankruptcy exemptions can fall under state law so can vary from state to state. If your home does have equity, you will want to consider filing a Chapter 13 Bankruptcy in order to keep your home.
Reaffirming the Debt
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In order to keep a home in a Chapter 7 bankruptcy the debtor must "reaffirm" the debt on the home loan once they have obtained a property exemption from the bankruptcy court. By reaffirming the debt, you are agreeing to repay the loan as agreed in your mortgage loan.
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Chapter 13 Bankruptcy
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A Chapter 13 bankruptcy (sometimes referred to as "wage earner's bankruptcy") is for a family that has a regular stable income, but is unable to meet their current payments. Filing for a chapter 13 bankruptcy will enable a family to come up with a repayment plan negotiated with their debtors to repay the debts with reduced payments over a longer period of time. By reducing the family's monthly payments, many families can continue to make their house payments and stay in their home.
Confirmation Meeting
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During a Chapter 13 bankruptcy, the court will hold a confirmation meeting where the court will either approve or deny the plan to repay the debts. If a family is behind on their house payments, the plan will include a payment plan to the mortgage company to repay any late payments or fees. Once the plan is approved, you will be required to make payments through the court trustee to repay your debts. During this time you must continue to make your house payments. A Chapter 13 Bankruptcy is not officially discharged until the payment plan is over and all payments have been made. This can take anywhere from three to five years.
Walking Away
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The last option is to file a Chapter 7 Bankruptcy and walk away from the home. This is considered a last resort, but can be a viable option for families that owe more on their home than it is worth and are unable to make their house payments. By filing a Chapter 7 Bankruptcy and walking away from the home, a family can get a fresh start. However, families should know that by claiming bankruptcy and letting their home be foreclosed on, it will be very difficult to obtain credit in the future.
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