Does Bankruptcy Protect Your House?

Bankruptcy may not prevent the foreclosure sale of your home.

If foreclosure is looming in your near future, then you may consider bankruptcy as an option to either delay or permanently prevent the sale of your home. However, bankruptcy is not always an effective option at protecting your home. In fact, bankruptcy may not protect you from foreclosure, and even if it does, you may still lose your home as part of the bankruptcy process.

Trustee Liquidation

The most commonly understood form of bankruptcy is chapter 7 liquidation bankruptcy. Under chapter 7, a bankruptcy trustee will attempt to liquidate, or sell, as much of your property as possible. The trustee does this in order to raise money to pay off as many of your creditors and debts as the trustee can. Generally, the trustee has the power to sell any of your non-exempt property. Exemptions are provided under state law, so they vary depending on which state law applies. Exemptions on homes range from $5,000 to unlimited. It is critical that you first check the exemption allowed in your state before you file chapter 7 bankruptcy, because if your home equity exceeds the exemption amount, then the trustee will likely sell your home and simply give you cash equal to the exemption amount.

Debt Repayment Plan

Typically, the better option for homeowners is to file chapter 13 bankruptcy instead of chapter 7. Chapter 13 bankruptcy involves debt repayment instead of liquidation. In other words, the bankruptcy trustee does not sell any of your property under chapter 13 bankruptcy, which means there is no risk that you will lose your home. Of course, if you fail to make your mortgage payments then, you can still lose your home in a mortgage foreclosure even after you file chapter 13 bankruptcy.

Reorganization Plan

Although chapter 11 bankruptcy is generally designed for business reorganization, it is technically available to individual debtors and can be an effective way of protecting a home from foreclosure. Importantly, creating a chapter 11 reorganization plan is always more expensive than carrying out a chapter 7 or chapter 13 bankruptcy. The minimum amount of attorney and professional fees that you are likely to pay in a chapter 11 bankruptcy is at least $20,000 as of 2011. Therefore, chapter 11 only make sense if you have a substantial amount of equity that you want to protect.

Automatic Stay

As soon as you file a petition for chapter 7, 11, or 13 bankruptcy, the law imposes an automatic stay. This means your mortgage lender must immediately cease any foreclosure activity. This can buy you some important time to figure out how to best protect your home. However, the automatic stay only remains in effect for as long as your bankruptcy case is pending, and the bankruptcy judge has discretion to grant your mortgage lender relief from the automatic stay, which means the lender can foreclose even while you're still in bankruptcy. No type of bankruptcy will discharge the mortgage lien on your home, so if you ever default on your mortgage payments, then the lender always will have the option to foreclose even after bankruptcy. This provides temporary protection from home foreclosure, but bankruptcy is generally not a permanent solution for protecting your home from foreclosure unless you are able to bring your mortgage current while the automatic stay is in effect.

References

• "The New Bankruptcy: Will it Work for You?"; Stephen Elias; 2009