Will I Lose My Home With Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is sometimes called the "all-out" or straight bankruptcy because, under this section of the code, a debtor may surrender a large portion of his assets in exchange for a discharge of debts. But some assets don't get surrendered under the bankruptcy code. Whether you lose your house in Chapter 7 bankruptcy depends on the state in which you live and on the amount of equity you have in your home.
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Exempt vs. Non-exempt
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Most assets in a chapter 7 bankruptcy are sold to pay creditors, who usually receive pennies on the dollar. But certain assets are exempt from sale. The Federal Bankruptcy Code exempts $17,000 in home equity, or $35,000 for married couples. Some states have laws that exempt much less. Fifteen states allow you to choose which law to follow, but in most states you must follow state law.
Example
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Imagine you have $100,000 in equity in your home and you live in a state that allows you to choose federal exemptions. You suffer a catastrophic loss of income and declare Chapter 7 bankruptcy. Under Chapter 7, the bankruptcy trustee may sell your home, giving you and your spouse $35,000, paying the balance of the mortgage and distributing the rest to creditors. If you have less than $35,000 in equity, the trustee will not sell the house. If you keep the house, you must continue to pay the mortgage. The bankruptcy process will not eliminate mortgage debt.
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Florida House Exemptions
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Under Florida law, any house inside a municipality that sits on less than half an acre is exempt as is any house in an unincorporated area that sits on 160 acres or less. This means that some owners of multi-million dollar beachfront condos can declare Chapter 7 and keep their homes. These homestead exemptions apply only to houses that are a primary residence. If you bought your home within four years of filing for bankruptcy, your largest exemption is $125,000, even if your state allows a larger exemption. If your state has a smaller exemption, you must follow that.
Means Test
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Changes to federal bankruptcy law have made it more difficult to file for Chapter 7 bankruptcy. The court determines, using a formula, whether a petitioner has the means to pay his debts. If he does, a judge forces him into a Chapter 13 case in which the petitioner makes monthly payments for several years to the court, which then distributes funds to creditors. Under Chapter 13, those payments may cover all or a part of the debtor's total debt.
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References
- Photo Credit small house, big house image by Nino Pavisic from Fotolia.com
