How Bankruptcy Affects Your Home and Property: What You Need to Know

Filing for bankruptcy can be an overwhelming and complex decision, especially when you own property like a home, car, or other valuable assets. One of the primary concerns for individuals facing bankruptcy is how it will affect their property, particularly their home. Many people worry that filing for bankruptcy will lead to the loss of their home, while others may wonder if bankruptcy can help them keep their property in the face of overwhelming debt.

In this article, we will explore how bankruptcy affects your home and other property, including how it varies between Chapter 7 and Chapter 13 bankruptcy, and what you can do to protect your assets during the bankruptcy process.

1. How Bankruptcy Affects Your Home

The way bankruptcy affects your home depends on several factors, including the type of bankruptcy you file, the equity in your home, and whether or not you're behind on your mortgage payments. Let’s break down how bankruptcy impacts homeownership in the two most common types of bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy and Your Home

Chapter 7 bankruptcy, also known as liquidation bankruptcy, is designed for individuals who have limited income and cannot repay their debts. When you file for Chapter 7 bankruptcy, a bankruptcy trustee is appointed to liquidate your non-exempt assets to repay your creditors. This means that your home could be sold if it is considered non-exempt, though many individuals are able to keep their homes through exemptions.

Exemptions in Chapter 7 Bankruptcy

Each state has its own set of exemptions that determine which property is protected in a Chapter 7 filing. In many states, there are exemptions that allow you to keep your home if it’s under a certain equity threshold. Equity refers to the value of your home minus the amount you owe on the mortgage. For example, if your home is worth $200,000 and you owe $150,000 on your mortgage, your equity is $50,000.

If your home’s equity falls within the state’s exemption limit, you may be able to keep it during Chapter 7 bankruptcy. However, if the equity exceeds the exemption limit, the trustee may choose to sell the property to pay off creditors.

What Happens if You’re Behind on Mortgage Payments?

If you’re behind on your mortgage payments, Chapter 7 bankruptcy can temporarily stop foreclosure proceedings through an automatic stay. However, this stay is usually temporary, and you may still face foreclosure if you can’t catch up on your mortgage payments after the bankruptcy is discharged. Chapter 7 does not offer a repayment plan for overdue mortgage payments, so if you’re behind on your payments, Chapter 13 bankruptcy might be a better option for saving your home.

Chapter 13 Bankruptcy and Your Home

Chapter 13 bankruptcy, also known as reorganization bankruptcy, allows individuals with a regular income to restructure their debts and create a repayment plan. In this type of bankruptcy, you will work with a bankruptcy trustee to propose a plan to pay back a portion of your debts over a 3 to 5-year period. The most significant advantage of Chapter 13 bankruptcy when it comes to protecting your home is that it allows you to catch up on missed mortgage payments and prevent foreclosure.

How Chapter 13 Helps with Foreclosure

If you’re behind on mortgage payments, Chapter 13 can stop foreclosure proceedings and give you time to catch up on your payments. The missed payments are consolidated into your repayment plan, allowing you to pay them off over the course of the plan. As long as you stick to the plan, you can keep your home and avoid foreclosure. Chapter 13 is particularly helpful for homeowners who are struggling with mortgage arrears but have the ability to pay in the future.

Retaining Your Home in Chapter 13

Even if you have significant equity in your home, Chapter 13 bankruptcy provides an opportunity to protect your home from liquidation. The repayment plan will take into account your income, debts, and the value of your assets, allowing you to reorganize your finances without the threat of losing your home. However, it’s important to remember that your ability to keep your home depends on your ability to make regular payments during the bankruptcy period.

2. Can You Keep Other Property in Bankruptcy?

In addition to your home, bankruptcy can impact other valuable assets like cars, savings, and retirement accounts. Whether you can keep these assets depends on the type of bankruptcy you file and the exemptions available in your state.

Chapter 7 Bankruptcy and Non-Exempt Property

In Chapter 7 bankruptcy, non-exempt assets may be sold to repay creditors. Non-exempt assets include items that are not covered by bankruptcy exemptions, such as luxury goods or assets with significant equity. If you have property with significant value that is not protected by exemptions, the bankruptcy trustee may sell it to satisfy your debts.

Some common exemptions in Chapter 7 include:

• Homestead exemption: Protects a portion of the equity in your primary residence.

• Personal property exemption: Protects clothing, household goods, and personal items.

• Vehicle exemption: Protects a certain amount of equity in your vehicle.

Each state has its own exemption laws, so it’s crucial to consult with a bankruptcy attorney to understand which assets may be at risk and which you can keep.

Chapter 13 Bankruptcy and Non-Exempt Property

In Chapter 13 bankruptcy, non-exempt assets are generally not sold. Instead, you are required to pay a portion of the value of these assets through your repayment plan. For example, if you have non-exempt property, the value of that property will be considered when calculating your monthly repayment amount. In Chapter 13, the goal is to keep as many assets as possible while creating a manageable plan to repay your creditors.

3. What Happens If You Want to Sell Your Home During Bankruptcy?

If you file for bankruptcy and want to sell your home, the process is different depending on the type of bankruptcy you filed.

In Chapter 7 Bankruptcy:

If your home is considered non-exempt and the bankruptcy trustee decides to sell it, the proceeds from the sale will go toward repaying your creditors. If you have enough equity that exceeds the exemption limit, you may be forced to sell your home to satisfy the debt. However, if your home is exempt, you will likely be able to keep it even if you decide to sell.

In Chapter 13 Bankruptcy:

In Chapter 13, you are allowed to keep your home, but if you decide to sell it, the proceeds will be considered part of your repayment plan. Any money from the sale of your home that exceeds your mortgage balance will be used to pay off creditors according to the terms of your bankruptcy plan. In some cases, the sale of the home may accelerate the repayment of debts, allowing you to complete the bankruptcy process sooner.

4. What to Do If You Want to Protect Your Home During Bankruptcy

If you are concerned about losing your home in bankruptcy, here are a few tips to protect your property:

1. Work with a Bankruptcy Attorney

A qualified bankruptcy attorney can help you navigate the process and advise you on how to protect your home. They will help you determine the best type of bankruptcy to file based on your financial situation and help you understand the exemptions available in your state.

2. File for Chapter 13 If You Are Behind on Mortgage Payments

If you are facing foreclosure or struggling to make mortgage payments, Chapter 13 bankruptcy may be the best option. This will give you the opportunity to catch up on overdue payments and keep your home.

3. Consider Downsizing or Selling Your Home

If you have significant equity in your home, it may be worth considering downsizing or selling your property before filing for bankruptcy. This could allow you to pay off creditors and reduce your debt load without losing your home.

Filing for bankruptcy can have a significant impact on your home and other property. While Chapter 7 bankruptcy may result in the sale of your home if its equity exceeds the exemption limit, Chapter 13 bankruptcy offers more flexibility and the ability to catch up on missed mortgage payments through a repayment plan. Understanding the potential effects of bankruptcy on your property and working with a bankruptcy attorney can help you make informed decisions to protect your home during the process.

If you're struggling with overwhelming debt and worried about losing your home, it's important to consider all your options and determine the best course of action for your financial future. With the right guidance, you can navigate bankruptcy successfully and work towards regaining financial stability while protecting your most valuable assets.