Filing bankruptcy doesn't have to mean losing your house. Whether or not you're able to keep your house depends on a range of factors. The type of bankruptcy you file, the amount of equity you have in your home, and the state in which you live can all impact what happens at the end of the process. Whether or not your loan is current is also a major consideration.
Filing bankruptcy might be able to erase your personal debts. However, it doesn't erase the consequences of those debts. When you take out unsecured debt, like a credit card, the lender gives you access to money based on nothing but the expectation that you'll pay it back. Bankruptcy wipes out that expectation. Debt that is secured by collateral, like a car loan or a home loan, gets treated differently. While your personal responsibility for the debt gets wiped out, the lender's right to the collateral doesn't. This is why you can keep the shirt that you bought with a credit card after your bankruptcy, but you can lose your house or car if you don't make the payment.
Chapter 7 Bankruptcy
Chapter 7 bankruptcies are sometimes called liquidation bankruptcies. If you qualify to file under Chapter 7, all of your unsecured debts will get wiped out. The drawback to filing bankruptcy this way is that your assets will have to get sold to pay off your creditors. You get to exclude a certain amount of money, belongings, equity in your car and equity in your home, but anything over that threshold is fair game for the bankruptcy court to distribute. Where this comes into play is that if you have more equity than your state shelters from the bankruptcy court, your home can be sold. For instance, if your state allows you to keep $75,000 of equity in your house and you have $90,000 of equity, the court will sell your house and give you the $75,000 but use the other $15,000 to pay off your debts.
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, you can save more of your assets. The drawback is that you'll have to pay off some or all of your debts over a period of three to five years -- they won't get liquidated like they would in a Chapter 7 bankruptcy. Since you're paying your creditors off, at least in part, there's less need for the bankruptcy court to take your property to pay the credits. Because of this, it's more likely that you can hold onto a home with significant equity in this type of bankruptcy. You might also get an additional chance to renegotiate your loan or stretch out your payments.
Your Home Loan
Bankruptcy can slow down foreclosure, but it won't stop it. If you don't pay your home loan, you will lose your house in a bankruptcy. Furthermore, bankruptcy courts generally don't have the ability to reduce the balance of the mortgage on your first loan. As such, the only way to keep your home after a bankruptcy is to use the bankruptcy to clear up your other debts so that you have the money to pay your home loan.
- NBC News: Filing for Bankruptcy Could Save Your Home
- Forbes: Going Bankrupt in 2012, But Keeping Your Home
- Nolo: Your Home in Chapter 7 Bankruptcy
- U.S. Courts. "Federal Court Finder." Accessed May 18, 2020.
- U.S. Courts. "Chapter 7 Means Test Calculation." Accessed May 18, 2020.
- U.S. Dept. of Justice. "LIST OF APPROVED PROVIDERS OF PERSONAL FINANCIAL MANAGEMENT INSTRUCTIONAL COURSES (DEBTOR EDUCATION) PURSUANT TO 11 U.S.C. § 111." Accessed May 18, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.