If you want to file for bankruptcy, you may be concerned about whether you can keep your house in Chapter 7. It is a common and valid concern for anyone considering bankruptcy. However, the answer to that question depends on a few factors.
Can You Afford to Keep Your House in Chapter 7?
It can be difficult to catch up when you get behind on your house payments. After missing two or more mortgage payments, it can be impossible to come up with one lump sum to catch up on the payments. Eventually, your mortgage company will demand the entire amount of the past due mortgage payments or it will begin foreclosure proceedings.
The first question you need to address is whether you can afford to keep your house. Can you make the mortgage payments after paying your necessary living expenses? If not, you might want to consider surrendering your home in Chapter 7 to get a fresh start.
Try our Houses Before and After Bankruptcy Calculator to get a better I if you can keep your home in Chapter 7 based on your specific information.
What Happens When I Surrender My Home in Chapter 7?
If your mortgage company forecloses on your home, it sells the home at a foreclosure auction. In most cases, the proceeds of a foreclosure sale do not pay the mortgage loan in full. Therefore, you owe a deficiency balance.
The deficiency is the difference between what you owe the mortgage company and the amount of money it receives from the foreclosure sale. If the company asked for a deficiency judgment, you now have a personal judgment against you for the deficiency amount.
Depending on the laws in your state, the mortgage company could ask the court to issue a wage garnishment order to collect the deficiency judgment. So now, you lost your home, and your wages are being garnished.
Furthermore, if you had a second mortgage on the home, you owe that amount in full to the second mortgage holder. That company can file a debt collection lawsuit to obtain a judgment and wage garnishment order.
However, the mortgage lender cannot ask for a deficiency judgment if you surrender your home in a Chapter 7 bankruptcy case. It cannot obtain a wage garnishment order or take any action to collect any amount owed after the foreclosure sale. The Chapter 7 bankruptcy discharge gets rid of the mortgage debt in full.
What if you want to keep your house in Chapter 7 and you can afford to make the mortgage payments? Then, you would need to consider whether your home has any non-exempt equity?
Does Your House Have Non-Exempt Equity?
Equity is the value of your home after deducting any filed liens against the home. In other words, it is the net amount you would receive if you sold your home.
For example, let’s assume the market value of your home is $150,000. However, you owe your mortgage lender $100,000, and your homeowner’s association filed a lien for $1,200. Therefore, the equity in your home would equal $48,800.
Market Value $150,000
LESS Mortgage payoff $100,000
LESS Homeowner’s Assoc. $ 1,200
Equity $ 48,800
In a Chapter 7 bankruptcy, the bankruptcy trustee sells assets to benefit unsecured creditors. In other words, the Chapter 7 trustee sells an asset and uses the money to pay your unsecured debts. However, the only reason a trustee would be interested in your home would be if he could sell the house for enough money to pay some of your unsecured debt.
In our example above, the trustee could make over $40,000 after closing costs to pay to your unsecured creditors. However, bankruptcy exemptions protect the equity in specific assets from being used to pay unsecured debts.
What Is the Homestead Exemption for My Home?
A homestead exemption protects the equity in your home from the trustee and creditors. The bankruptcy trustee cannot use the exempt funds to pay your debts.
The Bankruptcy Code provides federal bankruptcy exemptions, including a homestead exemption. The current federal bankruptcy exemption for a home is $27,900. The amount doubles for a married couple who own the home together.
However, the Bankruptcy Code permits states to “opt out” of the federal bankruptcy exemptions by enacting state exemptions. Therefore, the exemption laws vary by state. Some states allow debtors to choose between federal and state bankruptcy exemptions. Other states require debtors to use state bankruptcy exemptions.
We have a list of the bankruptcy homestead exemptions by state in 2022 available here. You can also access our free bankruptcy exemptions calculator to help you understand what assets might be at risk in a bankruptcy case.
Let’s assume your state allows you to choose federal or state bankruptcy exemptions. In our example above, you and your spouse claim $27,900 as a homestead exemption. In that case, your home’s equity is protected by a bankruptcy exemption. Therefore, there is no reason for the Chapter 7 trustee to sell your home.
Can You Keep Your House in Chapter 7 With Non-Exempt Equity?
If your home has non-exempt equity, filing Chapter 7 could be a problem. You would need to pay an amount equal to the non-exempt equity to the Chapter 7 trustee to keep your home.
You might pay a slightly lower amount than your net equity because the Chapter 7 trustee would also deduct the cost of sale from the amount he would accept for you to keep your house in Chapter 7. We discuss how a Chapter 7 trustee values a home in more detail here.
You may want to explore Chapter 13 to keep your house if you have non-exempt equity. Instead of losing your home, you can pay the non-exempt equity through your Chapter 13 plan.
Should I File a Chapter 7 Bankruptcy Case?
Deciding whether to file Chapter 7 can be a difficult decision. Try our free Chapter 7 bankruptcy calculator to get more information about filing Chapter 7.
If you are concerned about your home in Chapter 7, talk with an experienced bankruptcy lawyer. Ascend can help you locate a bankruptcy lawyer near you who offers free bankruptcy consultations. We can also discuss other debt-relief options.
