What Happens To Your House When You File For Bankruptcy

One of the greatest fears that many people have when filing for bankruptcy is the fear of losing their home. For many their home has holds happy memories and emotions. It it is a place were they have invested a lot of time and money and the last thing they want to happen is to lose it. Fortunately, if they keep their mortgage payments current during the length of the bankruptcy process and the equity in the property is protected they can still keep their house.

Problems arise when they start to miss their mortgages repayments. The deadline for making payments differs from state to state but it commonly is 90 to 120 days. If they have not paid their monthly payments within these time periods the lender can proceed to mark their credit report with a defaulting notice on the loan and proceed with a foreclosure unless the unpaid debts are repaid in full.

Although, bankruptcy laws are complicated it is important to gain a basic understanding of how your assets and rights can be affected during the bankruptcy process. One of those laws are related to bankruptcy exemptions.

The Homestead Exemption Laws

What happens to your house when you file for bankruptcy will depend on a number factors. The good news is that under certain circumstances you will not lose your home. This has a lot to do with the Homestead Exemption laws that have now become statute in many states. The Homestead Exemption was put in place to protect the value of a residents home or property from a forced sale in order to pay their creditors.

What this law means is that the equity in your house can be exempt from being used to pay off your debtors. The equity exemption levels vary from state to state. For example, Alaska equity exemption is $54,000 whereas, in California you can protect up to $75,000 for a single person and $100,000 for a couple.

Not all states base the exemption on the properties values as other states such as Texas and Iowa will base the exemption on the size of the property in terms of acreage. Texas for example, has a 10 acre exemption limit on urban property and 100 acre exemption limit of 100 acres for rural properties.

What Happens If The Equity In Your House Exceeds The Exemption Limit

If you have filed for chapter 7 bankruptcy and the equity of your house exceeds the exemption limit then, the creditor has the option of forcing a sale. However, in this situation you could still keep your home if you file for chapter 13 instead. Under chapter 13 bankruptcy you will have to pay back an amount that equals the amount of equity that is not protected under the states homestead exemption laws.

If you decide to proceed with a chapter 7 and the unprotected equity is sufficient to pay for the house sale, cover the trustees commission and pay off the unsecured debts then, the bankruptcy trustee can decide to proceed with a sale. The proceeds of the sale can be used to pay the amount of the protected equity in your property, the commission of the trustee with the remaining proceeds being distributed equally among your creditors.

If you reside in a state that calculates your equity exemption on the size rather than the value of your personal property then, the amount of acreage that exceeds the exemption limit can be sold off.

Considerations Before Filing

If you have enough equity tied up in the value of  your property then you could still keep your home without having to file for bankruptcy. You could use the equity as security to remortgage the house and use that extra cash to settle your debts.

If circumstances mean that filing for bankruptcy is the only option then, you will have reduced the amount of equity in your home to take advantage of your states exemption laws. This should not be entered into lightly as you are basically borrowing new debt to pay old debt. You really need to work out the sums to ensure you can afford it and if it is financially viable

If you are in a situation where your state has a high exemption limit but, there is a lack of time to take advantage of it then, you could consider the option of using a debt consolidation loan to pay off your debts to give you that extra time needed. However, you should be particularly careful with whom you settle your debts with.

If it is perceived that you are giving preferential treatment to certain creditors and ignoring others then, this could work against you. For example, if you are paying off one creditor with $500 per month while others are only being paid $150 before filing, then the trustee could claim the balance back so that all the creditors are paid off equally.

Should You Keep The House

In certain circumstances keeping the property is not such a good idea. For example, if the amount of debt against the house is either equal to or exceeds the market value of the property then, it may be better to surrender the property rather than continuing to take on that burden of debt.

Many people find themselves in situations where they have taken on more than one loan on their property. In this way the cost of paying the combined mortgage and interest payments and additional home loans is greater than a house. In these circumstances it maybe more cost effective to remove that debt burden from your life through a foreclosure.

Bankruptcy law can be complex and it is advisable that you seek expert and professional help from a local bankruptcy lawyer who knows the federal and your local states laws . With legal advise you will be in a stronger position to make better informed decisions about how to proceed with your bankruptcy and the protection of your assets.

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