If I Own My Home Do I Lose it When Filing Bankruptcy?
One of the most personal and important assets a person can own is her home. Debt and bankruptcy can put that asset at risk, even if the owner owns her home outright. Depending on the type of bankruptcy a debtor files, and also on any applicable bankruptcy exemptions, a debtor may be able to protect her home during bankruptcy.
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Type of Bankruptcy Filed
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Homeowners can keep their homes based on the type of bankruptcy filed. For consumers, assets are generally only liquidated in a Chapter 7 bankruptcy. If the debtor is earning regular income, she may be able to file bankruptcy under Chapter 13. Chapter 13 bankruptcies reorganize a person's debt and establish a repayment plan for the debtor. A repayment plan under Chapter 13 does not require any assets to be liquidated and sold, but the debtor must comply with the terms of the repayment plan.
Protecting Equity
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If a debtor is eligible to file Chapter 7 and wants his debts discharged, he may still protect his home depending the equity of the home. The bankruptcy code allows for state and federal exemptions that protect a certain amount of equity in various classes of property. According to Nolo, the bankruptcy trustee seizes assets worth more than the equity protections so there is ample funds to pay the creditors. A debtor needs to check the local bankruptcy rules to determine whether state or federal exemptions apply.
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Determining What Exemption Rules Apply
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The applicable exemption depends on the local bankruptcy laws in the debtor's state. According to BankruptcyAction.com, the debtor must use the exemptions for the state that the debtor lived in for the past two years. If the debtor did not live in one state for two years, then the court will use the exemptions of the state where the debtor lived the majority of the time in the prior 180 days before filing bankruptcy. These rules prevent a debtor from moving to a state to receive a more favorable exemption limit. Exemption limits vary by state; according to Nolo, Massachusetts allows debtors to protect up to $500,000 in equity in a home, while in New York, the exemption limit is $50,000. The federal limit is $125,000.
How the Exemption Works
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After determining what exemption limit applies, the debtor must have his house valued. The federal exemption rules require the debtor to have acquired the house at least 1,215 days before the bankruptcy. If the house is worth as much or less than the exemption amount, the debtor may use the exemption to protect the house from being liquidated and sold.
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