Can I Keep My Home If I File Bankruptcy?
- Individual debtors, meaning non-business debtors, can generally choose to file either Chapter 7, 11, or 13 bankruptcy. Chapter 11 is a form of "reorganization" bankruptcy, and most individual consumers will not file under Chapter 11, but instead businesses will reorganize under Chapter 11. But, once in a while, an individual debtor may file under Chapter 11, and when that happens, the debtor can keep his home.
- You can also keep you home if you file for bankruptcy protection under Chapter 13, which provides a legal way for you to create a debt repayment plan that, once approved by the bankruptcy court, allows you to repay your creditors over a certain period of time. Usually the repayment terms are more favorable, such as more time, or lower interest rates and monthly payments. Because you are repaying all or most of your debts under Chapter 13, you probably won't have to sell any property, which means you can keep your home.
- You may have to sell your home under a Chapter 7 bankruptcy. Referred to as "liquidation," in a Chapter 7 filing most of your property is sold, or liquidated, and the money used to pay off as many of your debts as possible. The remainder of your debts are discharged, meaning you are no longer legally required to repay those debts. There are a few exceptions, notably taxes, student loans and family support obligations.
- Every state has laws that allow debtors to claim certain exemptions in a Chapter 7 bankruptcy, including an exemption for home equity. In most states, this is referred to as the "homestead exemption." You will need to check your state's homestead exemption amount, but generally the amount can range from $20,000 up to $250,000.
- Equity is the difference between the current fair market value of your home and the current payoff balance of any mortgages on your home. If your equity is less than the homestead exemption for your state, then you will not have to sell your home. But, if your equity exceeds the amount of your homestead exemption, then you will probably have to sell your home.
For example, suppose that you owe $200,000 on a home worth $250,000 and your state allows a $50,000 homestead exemption. Because your equity ($250,000 minus $200,000) equals $50,000, which is the amount of your homestead exemption, then you will not have to sell your home. But, if you owed only $150,000 then you would have $100,000 in equity and you would probably have to sell the home. You would be able to keep $50,000 and the other $50,000 would be used to pay off your other debts.