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When Do People Lose Their Homes in Bankruptcy?

One of the main concerns about filing bankruptcy is whether or not you can keep your home.  Because there are many different situations and choices of bankruptcy chapters, various factors come into play in determining whether you keep or lose your home.  There is no substitute for discussing your financial circumstances with an experienced bankruptcy lawyer, but here is some basic information about bankruptcy that relates to homes.

Keep up with mortgage payments

Foreclosure and bankruptcy are different legal actions, but what both have in common is that failure to make mortgage payments puts your home in jeopardy.  Even when you file for bankruptcy, whether a Chapter 13 where you make monthly payments or a Chapter 7 which liquidates your non-exempt assets, making mortgage payments is what secures your home.  Depending on how much equity you have in your home, it may be exempt property and not subject to Chapter 7 liquidation.  However, you still need to make mortgage payments on it.  After a bankruptcy discharge, while debts disappear, a valid lien (http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/DischargeInBankruptcy.aspx) on your house stays in effect.  In Chapter 7, when a house is exempt, and liquidation wipes out unsecured debts, you may find it much easier to keep up with house payments.

Your home and Chapter 7 vs. Chapter 13

Sometimes homeowners have fallen behind on mortgage payments.  Those who want to save their houses from foreclosure and need to make payments over time file Chapter 13 bankruptcy.  Chapter 13 involves a repayment plan and monthly payments through the bankruptcy trustee to pay off debts.

If a homeowner who is in financial trouble has managed to stay current on mortgage payments, the homeowner may want to consider chapter 7 to eliminate unsecured debts.  Homeowners who file Chapter 7 might face liquidation of their homes, however.  It really depends on how much equity you have in the house and whether federal or state exemptions protect your house.  On the other hand, if your house is quite encumbered and falling housing market prices have significantly diminished its value, you may want to consider just letting go of your home and discharging the debt to protect from collection of a deficiency balance.

Bankruptcy is not a one-size-fits-all financial remedy.  Discussing your options with an experienced bankruptcy attorney can help you tailor decisions for your specific situation.

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