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How to Keep Your House in Bankruptcy
Filing for bankruptcy doesn’t necessarily mean losing your home. If you know how to manage the process, it’s possible that you could keep your home and all major assets that are important to you and your family.
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Chapter 7 vs. Chapter 13 Bankruptcy
The type of bankruptcy you file plays a significant role in determining whether you can keep your home. Chapter 7 and Chapter 13 bankruptcy each have different rules and implications for homeowners.
Chapter 7 Bankruptcy: Known as liquidation bankruptcy, Chapter 7 is designed to eliminate unsecured debts, like credit cards and medical bills. While some of your assets may be sold to pay creditors, there are exemptions that could protect your home if it falls within a certain equity limit.
Chapter 13 Bankruptcy: Often called a “wage earner’s plan,” Chapter 13 allows you to reorganize your debts into a manageable repayment plan, typically lasting three to five years. This option can help you catch up on missed mortgage payments and keep your house, provided you stay current on the repayment plan.
Choosing the right type of bankruptcy depends on your financial situation, including the amount of equity in your home, your income, and the type of debts you owe.
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6 Tips for Keeping Your House in Bankruptcy
If keeping the house is your primary concern and focal point in bankruptcy, there are several things that you’ll need to do.
1. Stay Current on Mortgage Payments
If you want to keep your home during bankruptcy, staying current on your mortgage payments is crucial. Missing payments before or during the bankruptcy process can put you at risk of foreclosure.
In Chapter 7 bankruptcy, your mortgage lender may agree to reaffirm your loan, meaning you commit to continuing payments even though the debt isn’t discharged. In Chapter 13 bankruptcy, your repayment plan can include past-due payments, giving you time to catch up while maintaining your current mortgage schedule.
2. Claim a Homestead Exemption
One of the most important tools for protecting your home in bankruptcy is something known as the homestead exemption. This legal provision allows you to shield a portion of your home’s equity from creditors, preventing the bankruptcy trustee from using it to pay off your debts.
The homestead exemption amount varies by state, and some states offer unlimited exemptions for primary residences. It’s essential to know your state’s rules and how they apply to your situation.
As attorney Rowdy G. Williams explains, “Exemptions in bankruptcy law exist for certain types of property the debtor may own jointly or individually. If an exemption applies, this can mean that the debtor can shield it from the reach of the bankruptcy court to some extent.”
Your attorney can help you determine if the homestead exemption applies to your case and how to maximize its benefits.
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3. Restructure Payments Under Chapter 13
One of the biggest advantages of Chapter 13 bankruptcy is the ability to restructure payments, including past-due mortgage amounts. The repayment plan lets you catch up on missed payments over several years without the threat of foreclosure.
For example, if you’ve fallen behind on mortgage payments due to a temporary financial setback, Chapter 13 gives you breathing room to resolve the arrears while making regular payments. This option is particularly beneficial for homeowners who have a steady income but need time to stabilize their finances.
4. Reaffirm Your Mortgage
Reaffirmation is a process available in Chapter 7 bankruptcy that allows you to keep secured debts, like your mortgage, by agreeing to continue making payments.
When you reaffirm your mortgage, you essentially remove it from the bankruptcy discharge. This means you remain personally liable for the debt, but it also ensures that you can keep your home as long as you stay current on payments.
Before reaffirming your mortgage, carefully evaluate your financial situation. Make sure the payments are manageable and that keeping the house aligns with your long-term financial goals.
5. Work With a Knowledgeable Bankruptcy Attorney
Navigating the bankruptcy process can be overwhelming, especially when your home is at stake. A bankruptcy attorney can guide you through every step, including helping you:
- Determine which type of bankruptcy is best for your situation.
- Maximize exemptions to protect your assets.
- Develop a repayment plan that satisfies the court and your creditors.
- Address any challenges that arise during the process.
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6. Consider Refinancing Options
In some cases, refinancing your mortgage before filing for bankruptcy can help you secure more favorable terms and reduce your monthly payments. However, this option isn’t always feasible, especially if your credit has already taken a hit.
Before doing anything else, it’s a good idea to discuss refinancing with your attorney and lender to determine if it’s a viable solution for you. Once you know if it’s an option, you can begin to move further down this path.
Adding it All Up
When it’s all said and done, filing for bankruptcy doesn’t have to mean losing your home. If you’re smart about it and willing to link arms with a knowledgeable attorney, you can navigate the process and protect what’s most important to you.
