Can I File a Chapter 7 If I Own a Home?
Any debtor can file a Chapter 7 bankruptcy petition at any time, regardless of home ownership. Whether or not your assets such as a home are protected in bankruptcy depends on a number of factors. Each state has its own level of asset protection, known as exemptions, that can help you retain your home. You may also be able to continue making payments on your house throughout your bankruptcy in an effort to keep it.
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Bankruptcy Automatic Stay
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The moment you file a bankruptcy petition, the court offers you protection in the form of the automatic stay. The automatic bankruptcy stay prevents all creditors from continuing to pursue the collection of a debt from you. Your mortgage lender cannot take action against you for repayment until either the case is over, a payment agreement is reached or the bankruptcy court grants the lender relief from the automatic stay.
Bankruptcy Exemptions
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The state you live in decides how much equity in a home you can protect in a Chapter 7 bankruptcy case. Some states such as Florida have generous homestead exemptions, allowing debtors to keep homes of unlimited value, while others such as Tennessee only permit residents to keep $5,000 in home equity.
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Foreclosure
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While your Chapter 7 state bankruptcy exemptions may absolve you from the responsibility to pay your mortgage, your lender still maintains an equity interest in your house. A bankruptcy discharge does not remove the lien that your mortgage lender holds on your house, as secured debts are not discharged in Chapter 7 bankruptcy. If your home is worth less than the amount you owe, that excess amount is discharged as an unsecured debt, but the lender maintains the right to foreclose your house and recoup the secured portion of the debt.
Reaffirmation
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If you are current on your home mortgage and can afford to continue making payments, you may be able to keep your home through the process of reaffirmation. With reaffirmation you essentially waive your bankruptcy discharge rights regarding your home and agree to maintain your liability for the mortgage debt. If in the future you fall behind on payments, you will not have the protection of the bankruptcy court and will still be legally responsible for the mortgage.
Chapter 13 Protection
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If you cannot protect your house to your satisfaction by filing Chapter 7, you can consider filing Chapter 13 bankruptcy instead. Chapter 13 allows you time to catch up on late payments by placing your mortgage debt into a creditor payment plan. Your house is protected for the duration of a Chapter 13 bankruptcy if you continue making timely payments.
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