Can You Lose Your House in a Chapter 7 Conversion?
- Chapter 13 takes all debts and combines them into one monthly payment. A bankruptcy trustee contacts all creditors, let's them know about the Chapter 13 and how much they can expect to receive each month. The petitioner sends a lump payment to the trustee each month, who in turn disperses the funds to various creditors. Chapter 13 bankruptcy typically allows you to maintain your home, regardless of how much equity you have in it.
- Failure to maintain the agreed upon monthly Chapter 13 payment will result in the trustee asking the U.S. Bankruptcy Court to nullify the bankruptcy, which re-opens the door for creditors to pursue collection efforts. This can include lawsuits, wage garnishments and judgments. At any time during the Chapter 13 process, the petitioner can request that the bankruptcy be converted to a Chapter 7. Chapter 7 let's the petitioner walk away from most debts, but he must be willing to give up most assets to do so. In a Chapter 7 conversion, property, vehicles and other assets are sold by the trustee to help offset the debt to the creditors who will otherwise collect nothing.
- During the Chapter 7 conversion, the value of your house will be evaluated for determination about whether it will be sold. Each state sets the amount of equity it will allow a homeowner to keep and still file a Chapter 7 bankruptcy action. For example, at the time of this publication, the state of New Jersey allowed Chapter 7 bankruptcy petitioners to exempt up to $17,425.00 of home equity. If there is that much equity or less, the petitioner will not be required to sell the home as part of the bankruptcy. If the equity amounts to more than that amount, the trustee can order it sold to pay off some of the creditors.
- A way to keep the home during a Chapter 7 conversion, if there is more than the state allowed amount of equity involved, is to re-affirm the debt with the lender and re-sign to pay the loan. If the lender is willing to have you reaffirm the mortgage loan and begin paying on it, in most cases, the bankruptcy trustee will not force you to sell the home.