Can You File Bankruptcy and Keep Your House?

Many people who file Chapter 7 or Chapter 13 bankruptcy keep their home. Whether you can depends on several factors. You need to be current on mortgage payments. Your home equity must fall within your state’s homestead exemption. In Chapter 13, you can catch up on missed payments through a repayment plan. Filing bankruptcy doesn’t automatically mean losing your house.

Will I Lose My House if I File Bankruptcy?

Most bankruptcy filers who own homes keep them. Your ability to keep yours depends on which type of bankruptcy you file.

Chapter 7 and Chapter 13 are the most common types of personal bankruptcy.

Chapter 7 Bankruptcy Requirements

You can typically keep your home if:

• You’re current on your mortgage payments
• Your home equity is protected by the available homestead exemption

Chapter 13 Bankruptcy Requirements

You can typically keep your home if:

• You can catch up on missed payments through a 3-5 year repayment plan
• You can afford regular mortgage payments going forward

Understanding Chapter 7 Bankruptcy and Your Home

Filing Chapter 7 while keeping your home requires being current on mortgage payments. Check your state’s bankruptcy exemptions carefully. Some states allow you to choose between state and federal exemptions.

Every state has a homestead exemption. Your state’s law protects a certain amount of equity when you file bankruptcy. Home equity is the difference between your home’s current fair market value and what you still owe.

If your equity falls within the exemption limit, you can keep your home. You must continue making mortgage payments. But if your home’s equity exceeds the exemption, the bankruptcy trustee may sell your home. You would receive the exempted portion. However, you could lose the house.

Some states offer generous homestead exemptions that fully protect home equity. Others have lower limits. You can find your state’s exemptions by searching online.

Will the Bankruptcy Trustee Take My House?

If your home equity exceeds the homestead exemption, the Chapter 7 trustee might sell your home. Chapter 7 is sometimes called liquidation bankruptcy. The trustee can sell non-exempt assets to repay creditors. Note that this is rare.

To determine if your home is at risk:

1. Find your home’s market value
2. Subtract what you owe on your mortgage
3. Subtract the homestead exemption allowed in your state

If there’s any remaining equity after these deductions, the trustee can use it. They’ll pay off unsecured creditors. If your home is fully covered by the homestead exemption, you should keep it.

Home Equity Example

You own a home worth $250,000. You still owe $180,000 on your mortgage. Your state’s homestead exemption is $50,000.

First, calculate the equity: $250,000 minus $180,000 equals $70,000 in equity.

Then, subtract the homestead exemption from the equity: $70,000 minus $50,000 equals $20,000 in non-exempt equity.

Since there’s $20,000 in non-exempt equity, the trustee could sell the home. They’d pay off the mortgage. Then they’d give you the exempted $50,000. They’d use the remaining $20,000 to pay creditors.

But if your state had a $75,000 homestead exemption instead, your entire $70,000 equity would be protected. The trustee wouldn’t sell your home.

Keeping Your House in Chapter 13 Bankruptcy

Yes, Chapter 13 bankruptcy allows many homeowners to keep their homes. You can keep it even if you’re behind on mortgage payments.

Chapter 13 involves a repayment plan where you pay off debts over 3-5 years. As long as you stay current and follow your payment plan, you typically keep your home.

If you’re current with your mortgage payments, everything stays basically the same. You’ll continue making your regular monthly mortgage payments. You typically pay directly to the mortgage company.

Exemptions still matter in Chapter 13. They help determine how much you must repay to unsecured creditors. But unlike Chapter 7, the trustee won’t sell your home. You may have to pay more toward unsecured debts in your repayment plan.

Can Bankruptcy Stop Foreclosure?

It depends on the type of bankruptcy you file.

• Chapter 7 bankruptcy can temporarily stop foreclosure because of the automatic stay. The automatic stay is a legal protection that halts collection activity. But the mortgage lender may still foreclose if you’re behind on payments.
• Chapter 13 bankruptcy can stop foreclosure and give you time to catch up.

A Chapter 13 repayment plan allows you to spread out past-due payments over 3-5 years. During this time, you also keep up with current payments. Your monthly income must be high enough to cover your regular mortgage payments and your Chapter 13 plan payments.

Will Filing Bankruptcy Make Mortgage Payments Easier?

Possibly! Your bankruptcy discharge wipes out most of your unsecured debts. Unsecured debts include medical bills, credit card payments, personal loan payments, and other debts.

With these debts gone, you can focus on the expenses that really matter. Filing bankruptcy often makes it easier to keep up with monthly housing payments. You can manage other living expenses better.

As soon as you file your bankruptcy case, the automatic stay kicks in. Collection efforts stop while your case is active. Bankruptcy filers report that this gives them breathing room. They can make a financial plan. It reduces their stress considerably.

Alternatives to Bankruptcy for Homeowners

Bankruptcy can help some homeowners, but it’s not the only option. If you’re behind on mortgage payments, explore these alternatives first:

• Loan modification: Your lender may agree to adjust your loan terms. They might lower your monthly payment. They might add missed payments to the end of your loan.
• Forbearance: Some lenders offer temporary payment relief. You can pause or reduce payments for a set period.
• Repayment plan: If you’ve fallen behind but can afford to catch up, your lender may help. They may allow you to spread out missed payments over several months.
• Refinancing: If you qualify, refinancing your mortgage could lower your monthly payments. Refinancing makes it easier to stay current.

If these options aren’t enough to keep your home, Chapter 13 may work. Chapter 13 bankruptcy allows you to catch up on missed payments over time. It stops foreclosure in its tracks. Chapter 7 bankruptcy may be an option if you can’t afford to keep the home. It can eliminate personal liability for the mortgage.

Beware: Watch out for scams! If a company promises to “save your home” in exchange for upfront fees, do your research. Make sure it’s a legitimate program.

If you’re considering bankruptcy and need guidance, speak with a bankruptcy attorney for free to understand your options.

How Bankruptcy Affects Your Mortgage

Homeowners considering bankruptcy have many questions about how it affects their mortgage. Below are answers to common questions about mortgages, foreclosure, and bankruptcy.

What Happens to Your Mortgage When You File Bankruptcy?

Home loans, like mortgages, home equity loans, or home equity lines of credit, are secured debts. The bank has a sort of ownership interest in the real estate. As long as you make your monthly payments and your home equity is protected by state exemptions, the home is yours to keep.

If you don’t pay your mortgage loan, the bank can take the house back through foreclosure. That’s true even after you get a bankruptcy discharge.

Because of this, keeping your home means keeping your mortgage debt. There’s no such thing as a free house.

Can Bankruptcy Help Me Catch Up on Missed Mortgage Payments?

Yes, Chapter 13 bankruptcy can help you catch up on missed mortgage payments. It can stop foreclosure. Chapter 13 allows you to spread past-due payments over 3-5 years. You keep up with your regular mortgage payments. As long as you follow the repayment plan, your lender can’t foreclose on your home.

However, Chapter 7 bankruptcy doesn’t provide a way to catch up on missed payments. If you’re behind, your lender can still proceed with foreclosure. They may agree to a loan modification or repayment plan outside of bankruptcy.

What Is Mortgage Modification Mediation in Chapter 13 Bankruptcy?

Many bankruptcy courts offer mortgage modification mediation (MMM) programs. These programs help homeowners negotiate with their lenders during Chapter 13 bankruptcy. The process doesn’t force the bank to modify your loan. But it streamlines communication and encourages good-faith negotiations.

Here’s how it typically works:

1. Either you or your lender requests mediation through the bankruptcy court. Some courts require you to dedicate a certain percentage of your income to a modified mortgage payment.
2. You submit required financial documents through a secure online portal. This makes it easier for both sides to track and review paperwork.
3. Your lender reviews your information to determine whether you qualify for a mortgage modification.
4. If you don’t qualify, a mediation session is scheduled. A neutral mediator helps you understand why. They explain whether changes could make you eligible.
5. If you and your lender reach an agreement, the court must approve it. Court approval makes the new mortgage terms legally binding.

While not all bankruptcy courts offer MMM, it can be valuable. It helps homeowners avoid foreclosure. It makes mortgage payments more manageable.

Does Bankruptcy Remove My Second Mortgage?

In some cases, Chapter 13 bankruptcy can strip a second mortgage. Your home must be worth less than what you owe on the first mortgage. Chapter 7 generally doesn’t eliminate second mortgages.

Should I File Chapter 7 if I’m Giving Up My Home?

Filing Chapter 7 bankruptcy may help if you’re surrendering your home. You may have concerns about remaining mortgage debt. In some cases, if a lender sells the home for less than what’s owed, they can seek a deficiency balance from you. That’s the remaining amount after the sale. Some lenders may even sue you to get a deficiency judgment. The judgment allows them to collect the unpaid balance through wage garnishment.

Many people who file Chapter 7 find that it eliminates personal liability for mortgage debt. This includes deficiency balances and judgments. It can also discharge other unsecured debts, such as credit card balances and medical bills.