Will I Lose My Home Filing Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is what's known as a liquidation bankruptcy. It wipes the slate clean of most debt, but it also means many of your assets---the things you own---are vulnerable to being sold off to pay your creditors. Every state has its own bankruptcy law, and state and federal statutes contain exemptions---a list of things you may keep. Depending on where you live, your home may be exempt in a Chapter 7 bankruptcy.
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State vs. Federal
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The first thing is to find out if in your state you are allowed to claim either the state or federal exemptions. Some states allow you to file under either. Some states insist you file under local exemptions only. Under federal law, as of 2011 you are allowed to claim $20,200 of the equity in your home as safe from your creditors (a "homestead exemption"). The limit will probably be different under your state law. Some states such as Kansas, Texas and Florida have unlimited homestead exemptions, and some, such as Pennsylvania, Maryland and Delaware, have none at all.
The Calculation
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The calculation of your equity is not usually based on a fair market value, but on the price your home would fetch under a quick, forced sale---likely somewhat less than its true value. From this estimated amount, subtract the amount still owed on your mortgage, plus the transaction costs. The remaining amount is the equity in your home. If this is less than the exemption available to you in your state, you may keep your home. If it is greater, your home may be sold to pay off your debts. On the other hand, if you have no equity in your home, for instance if it has lost value since you took out your mortgage, it cannot be used to pay your debts so you will be allowed to keep it, so long as you keep paying the mortgage.
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Time Limit
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If you bought your home within 1,215 days of the date of your bankruptcy filing (approximately 3.3 years), your homestead exemption is limited to $136,875 or your state's exemption, whichever is less. This means you cannot take advantage of any unlimited exemptions if your state has them.
Mortgage
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To be sure to keep your house, you must keep up your mortgage payments. You must also file what are known as re-affirmation papers with your mortgage lender. This assures the mortgage company that you wish to continue to hold the mortgage debt, despite your other debts being wiped out by bankruptcy.
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References
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