If your debt load is overwhelming, bankruptcy may be the only sensible option to lift the weight from your shoulders. Before you petition, it is important to know what will happen to your home. The outcome depends on the type of bankruptcy you file, your mortgage debt, and whether you qualify for your state's homestead exemption, which protects the equity in your home.
Generally speaking, you can opt between two types of bankruptcy. Chapter 13 bankruptcy buys you time to get current on your debts. The court will establish a repayment plan, which aims to pay off your arrears over a fixed period of time, typically three or five years. If you file for Chapter 13, your mortgage remains in place and you can keep your home as long as you make up the delinquent payments according to the plan. A Chapter 7 bankruptcy sells the debtor's assets to discharge his outstanding debts. The court, acting through a bankruptcy trustee, takes ownership of your assets. You may lose your home if the bankruptcy trustee feels that he can use the equity in it to pay off your unsecured creditors.
The purpose of a Chapter 7 filing is to pay off the debtor's debts. Because of this, you can typically keep your home if you do not have enough equity in your home to warrant a sale, because a bankruptcy trustee will not sell your property if there is no chance of recapturing any distributable funds. If you have equity, the chances are the court will order a sale. To determine whether you have equity in your home, you must first know if you qualify for a homestead exemption.
Anyone filing for Chapter 7 bankruptcy can exempt certain assets up to a certain value. This includes a certain amount of real estate, known as the homestead exemption. Put simply, your creditors cannot touch your homestead exemption, and the bankruptcy trustee will not take your exempted sum into account when deciding whether you have enough equity to warrant selling your home. The homestead rules are complex; you'll need to consult an attorney. Exemptions apply on a federal and state level. They might be assessed against the market value of you home or against its acreage. You may have no entitlement if you've moved within the past two years. Typically though, you can exempt between $10,000 and $100,000, depending on your location and individual circumstances. If the trustee sells your home, he will first pay you the amount of your exemption before settling the balance of the mortgage loan.
Chapter 13 is the better option if you are behind in your mortgage payments and want to save your home. Unlike Chapter 7, the purpose of a Chapter 13 is to buy time for those struggling with their debt load to get current on their debts. In effect, it forces your lender to negotiate with you. Your lender cannot foreclose as long as you keep up your regular mortgage payments and make the arrears payments scheduled in the repayment plan. In addition, Chapter 13 offers various strategies to reduce your debt load. The bankruptcy trustee can, for example, reclassify junior liens, such as second and third mortgages, as low-priority unsecured debt, which sometimes you do not have to pay back at all.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.