You won't necessarily lose your home in Chapter 7 bankruptcy, especially if you don't have much home equity and your mortgage is current. But it can happen. Whether you'll lose your home after filing for Chapter 7 bankruptcy will depend on the following factors:
If you're behind on your payment, in foreclosure, or can't exempt all of your home equity, you'll have a better chance of keeping your home using Chapter 13 bankruptcy. Filers faced with those circumstances should learn more about choosing between Chapter 7 or Chapter 13 when keeping a home.
Chapters 7 and 13 work very differently, so it's essential to understand what you must do to keep valuable property in Chapter 7. Here's how it works.
After filing for Chapter 7, your property will go into a bankruptcy estate held by the Chapter 7 bankruptcy trustee appointed to your case. The trustee will sell property in the estate for the benefit of creditors.
However, you don't lose everything you own.
You can "exempt" or remove property from the estate your state determined is reasonably necessary to maintain a home and employment. You'll find out what you can keep by reviewing your state's bankruptcy exemptions.
Here's the tricky part—if you make a mistake, it's unlikely that the bankruptcy judge will allow you to dismiss the case, and you could lose the house. So you must follow the rules carefully.
The automatic stay will temporarily stop a foreclosure when you file for Chapter 7. But if you're behind on the mortgage payment when you file, the best you can hope for is delaying the process for a few months.
It's also essential to be sure you can afford to continue paying the mortgage after a Chapter 7, because losing the house after your case might put you in a worse financial position. Why? If the lender couldn't sell the home for the amount you owe, you'd be stuck with a deficiency balance depending on the laws of your state.
Worse yet? You'd have to wait eight years to file a second Chapter 7 bankruptcy, leaving the lender plenty of time to collect a deficiency balance using collection methods such as garnishing your wages or levying on a bank account.
If your mortgage payment is up-to-date, your next step will be determining how much equity exists. You'll start by valuing your home.
Next, subtract any outstanding mortgage balance from the home value to get your "equity." The equity is the amount you'd have in your pocket after selling the house and paying the mortgage.
If you don't have any equity, you're in good shape. Trustees don't sell houses without equity. Otherwise, you'll need to be able to protect your equity with a bankruptcy exemption to avoid losing the home in Chapter 7 bankruptcy.
Learn more about filing for bankruptcy if you have equity in your home.
State exemption statutes list the property its residents can protect in bankruptcy. Some states allow residents to choose between the state exemption list or the federal bankruptcy exemption scheme. Either way, almost all states allow residents to protect some home equity with a homestead exemption. You might be able to exempt even more with a wildcard exemption.
If your exemptions adequately cover your equity, the trustee won't sell your home in a Chapter 7 bankruptcy. However, if your exemptions protect only a portion of it, the trustee will sell the house, pay off the mortgage, give you the amount you're entitled to exempt, and use the remainder of the sales proceeds to pay creditors.
Although you can't figure costs into your equity determination, the trustee will consider costs before selling the home. If, after deducting sales costs, the amount remaining isn't enough to make a meaningful payment to creditors, the trustee will abandon the property, and you'll get to keep it.
Learn more about your home in Chapter 7 bankruptcy.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
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