Can I File for Bankruptcy and Still Keep My House?

If you are like many people who are struggling financially, one of your biggest concerns is keeping your house. You might be especially concerned if you are thinking about filing for bankruptcy. You saved up for a down payment, and you’ve paid your mortgage every month—maybe for years or decades. Are you at risk of losing your investment if you need to file under Chapter 7 or Chapter 13?

While the answer to this question depends on your personal circumstances, many people are able to keep their homes after going through the bankruptcy process.

In fact, in many ways, filing for bankruptcy can actually help you keep your home. When you go through the bankruptcy process, you either eliminate many of your debts or “reorganize” your debts into a payment plan that you can manage month-to-month. Either way, the outcome is that you get a fresh start on solid financial footing. If your mortgage is one of the debts you decide to keep, your reduced overall debt load will make it easier to cover your mortgage, utilities and other monthly expenses.

So, how does it work?

Keeping Your House in a Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is referred to as a “liquidation” bankruptcy. This is because the primary purpose of a Chapter 7 bankruptcy is to eliminate unmanageable debts by paying what you can with the assets that you have (this process is referred to as liquidation).

But, while you will need to use some of your assets to pay your creditors, not all of your assets are on the table in a Chapter 7 bankruptcy.

Under Chapter 7, there are several exemptions that allow debtors to keep assets even if they could be used to help satisfy creditors’ claims. One of these is the “homestead exemption.” The homestead exemption allows Chapter 7 filers to keep their homes in certain circumstances.

Here’s how it works: The first thing you need to know is the amount of the homestead exemption in your state. In states like New Jersey that don’t have a homestead exemption, the federal exemption applies. Currently, the federal homestead exemption is $27,900 for individuals and $55,800 for spouses who co-own their homes.

Next, you need to know how much equity you have in your home. Let’s say your home in New Jersey is worth $300,000, and you currently owe $275,000. In this scenario, your equity would be roughly $25,000 (bank fees and other costs reduce your home equity for Chapter 7 bankruptcy purposes). Since your equity is below the homestead exemption, none of your equity is on the table in your bankruptcy—so you get to keep your home.

Even if the amount of your home equity is slightly above the homestead exemption, your bankruptcy lawyer may still be able to convince the judge that you don’t deserve to lose everything you have invested over the years. For example, if you are married and you have $60,000 of equity in the family home that you own jointly with your spouse, it is very possible that you could keep your home in this scenario as well.

Calculating your home equity for Chapter 7 bankruptcy purposes can be tricky. So, before you file, you will definitely want to discuss your situation with a lawyer. An experienced bankruptcy lawyer will be able to determine whether your home is likely to be at risk if you file under Chapter 7, and if so, your lawyer can help you explore the other options you have available.

Keeping Your House in a Chapter 13 Bankruptcy

One of these options may be to file for bankruptcy under Chapter 13 instead of filing under Chapter 7. Chapter 13 bankruptcies are referred to as “reorganization” bankruptcies because they involve reducing your monthly debt load to a manageable amount. The reorganization process covers all of the debts you wish to keep following your bankruptcy—including the mortgage for your home.

Here’s how it works: In a Chapter 13 bankruptcy, the homestead exemption still comes into play. But, instead of using the exemption to determine whether you can keep your home, you use the exemption to determine how much you have to pay.

For example, let’s say you are single and you have $40,000 in equity. With the federal homestead exemption, $12,100 of your home equity ($40,000 minus $27,900) would be on the table in your Chapter 13 bankruptcy. When developing your “reorganized” payment plan, you would generally be required to make provisions for paying this non-exempt amount to your unsecured creditors.

What if You’re Already Behind on Your Mortgage Payments?

It’s always best to file for bankruptcy before you fall behind on your mortgage and other monthly bills. But what if it’s already too late? What if you have already fallen behind on your mortgage payments, and you are researching your options because you are at risk of foreclosure?

Even in this scenario, you may still be able to keep your home.

One of the key benefits of filing for bankruptcy is that it implements an “automatic stay.” This prevents your creditors (including your mortgage lender) from pursuing foreclosure or collection during the bankruptcy process. As a result, filing for bankruptcy buys you time—and you can use this time to decide how best to address your financial circumstances.

If you are behind on your mortgage, you may have to come current on your payments in order to keep your home. Depending on your circumstances—and whether you file under Chapter 7 or Chapter 13—you may need to take other steps as well. These are all matters with which an experienced bankruptcy lawyer can help, and if you are facing foreclosure, we recommend that you speak with a lawyer as soon as possible.

Request a Free Consumer Bankruptcy Consultation

Do you need to know more about what you can do to protect your home? If so, we invite you to get in touch. To learn more about your options in a free and confidential consultation, please call 866-964-6529 or request an appointment online today.