Bankruptcy Laws & Homeownership
Bankruptcy is a complex legal process that can erase your qualifying debts and free up your finances. Depending on the type of bankruptcy you choose to file and the amount of equity you have in your home, you might lose your home during bankruptcy.
Other People Are Reading
-
Chapter 13 Bankruptcy
-
Chapter 13 personal bankruptcy is a reorganization of debt that does not wipe out your debt but rather modifies your obligations to lenders based on your income and cost of living. Under Chapter 13 rules, you will repay your debts over a period of three to five years. You can include your delinquent mortgage debts, such as missed payments and late fees, in your repayment plan. As long as you complete your Chapter 13 repayments as ordered by the court and you make regular, timely mortgage payments going forward after bankruptcy, you will not lose your home when you file Chapter 13.
Chapter 7 Bankruptcy
-
Chapter 7 bankruptcy is a complete elimination of debt available only to certain qualifying bankruptcy filers who pass their state's means test. If you qualify for and choose to file Chapter 7, you will not repay any part of your debts to lenders in a repayment plan, but your bankruptcy case trustee has the authority to liquidate some of your possessions to remit a portion of your balances to lenders and creditors. Federal bankruptcy rules allow for a homestead exemption applicable to the equity in your home of up to $21,165. If the equity in your home exceeds this amount, you may lose your home in Chapter 7 bankruptcy.
-
Liens and Bankruptcy
-
Though bankruptcy can cancel your obligations to a lender, it cannot remove a lien. If you decide to include the outstanding balance on your mortgage in your bankruptcy, you can expect to escape your obligation to your home loan lender, but the lien on your mortgage will stand. Even if the bankruptcy court alleviates your mortgage debt, your lender can still foreclose on your home, as it serves as collateral for your loan.
Avoiding Foreclosure
-
If you wish to remain in your home following bankruptcy, do not include your mortgage in your list of dischargeable debts in bankruptcy, and do not file for Chapter 7 bankruptcy if you have equity in your home that exceeds the greater of your federal or state homestead exemption limits. Continue making timely mortgage payments throughout and after your bankruptcy filing. If you cannot afford your monthly payments, the Federal Trade Commission suggests contacting your lender as soon as possible to make payment arrangements or see if you qualify for a mortgage modification that could lower your monthly payments.
-
References
- Photo Credit Jupiterimages/Photos.com/Getty Images
