If You File Bankruptcy, Can You Keep Your House?
An administrative officer of the bankruptcy court, called the bankruptcy trustee, may attempt to sell your house in a Chapter 7 bankruptcy if you have enough home equity. However, the trustee will never sell your house in a Chapter 13 bankruptcy regardless of the amount of your equity. As long as you make your payments, and your equity is protected by a legal exemption, then you will keep your house in bankruptcy.
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Guaranteed Safety
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Chapter 13 bankruptcy never involves liquidation, and liquidation is the part of bankruptcy that could present risk of loss for your home. This means that your home is always going to be safe in a Chapter 13 bankruptcy. Of course, if you fall behind on your mortgage payments, then you can still lose your home to foreclosure, even in or after a Chapter 13 bankruptcy.
Risk of Liquidation
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Chapter 7 bankruptcy is much more involved then Chapter 13 bankruptcy. In Chapter 7 bankruptcy the trustee will liquidate any property that is not for protected by a legal exemption. Most people filing bankruptcy do not have enough value in their home to risk loss of the home in liquidation. However, people with a significant amount of equity need to consider whether Chapter 7 bankruptcy will result in the loss of their home.
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Protection by Exemption
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The bankruptcy trustee is not allowed to liquidate any property that is protected by a legal exemption. Each state has enacted its own set of exemption protection laws. The state where you are a resident where you apply for bankruptcy will generally apply with regard to exemption protection laws. The exemption laws of each state differ. Only Nevada and Florida state law provide an unlimited exemption for the value of homes. All other states have a maximum amount of home equity that is protected by an exemption. The homestead exemption amount is as low as $5,000 in some states.
Excess Equity
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Before filing for Chapter 7 bankruptcy as a homeowner, you should calculate your home equity and compare it to the applicable homestead exemption in your state. If you have excess equity, meaning equity beyond the amount protected by your state's homestead exemption, then you risk losing your home to liquidation. However, if your equity is lower than the homestead exemption amount, then your home will not be lost in liquidation. Equity generally means the current fair market value of your home less any outstanding mortgage loans or home equity lines of credit.
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References
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