Chapter 7 Bankruptcy: Will You Lose Your Home?

Chapter 7 bankruptcy liquidates your assets and absolves you of all debts, but you could lose your home in the process. These kinds of bankruptcies are best for those who don’t want to take such a risk. While Chapter 13 bankruptcy allows you to make a plan to catch up on your mortgage payments, Chapter 7 does not.

Keeping Your Home With Chapter 7 Bankruptcy

The majority of people who file for Chapter 7 bankruptcy can keep their home if certain conditions are met. It is important not to have high equity and to respect your mortgage payments. If you meet these requirements, you have a good chance of not losing your house. However, you are in danger if the trustee has significant equity to pay creditors.

Mortgage Treatment Under Bankruptcy

Mortgage and home equity loans are secured debts, meaning that the bank retains ownership until the debts and interest are paid in full. If you don’t pay the mortgage, banks can foreclose on the house.

The debt remains after filing for any bankruptcy discharge of debts. Keeping your home means that you must continue to make mortgage payments.

Homestead Exemption of Home Equity

Problems can arise if you have considerable equity in your home when filing for Chapter 7 bankruptcy. The bankruptcy court might require you to sell your home, to satisfy other debts depending on whether you have more equity than your homestead exemption.

State law controls how much equity you can keep when filing for Chapter 7, which is called a homestead exemption. Only a few states allow you to keep all your equity. Therefore it’s critical to know and understand the law in your state.

There are a couple of things to consider when deciding to file for Chapter 7 or Chapter 13 bankruptcy. In general, Chapter 13 is recommended for people who have enough income and assets to repay part or all of their debts and maintain their mortgage payments.

State homestead exemptions vary widely. And the types of property that are exempt from liquidation differ as well. That’s why it’s important to consult a bankruptcy attorney to develop a sound legal strategy to protect your home.

If you have more equity than the homestead exemption, this is what will happen. The court will appoint a trustee to sell your home, give you the amount of your homestead exemption and use the remaining equity to apply to your other debts before your Chapter 7 bankruptcy discharge.

When Can You Be Evicted from Your Home

You can be evicted from your home after a Chapter 7 bankruptcy discharge. How long you have to vacate the premises depends on state law. Some states allow homeowners to remain on the premises during the post-sale redemption period, which might last several months. Other states set specific limits, usually between 3 and 30 days.

Eviction after bankruptcy affects renters as well. If you are a renter, you can get an automatic stay when filing for Chapter 7 bankruptcy. Creditors won’t be able to collect any debts during this period, which includes rent.

You will have a choice whether to reject or assume the lease after filing for Chapter 7 protection. If you reject the lease, your arrears in rent before filing for bankruptcy will be included in your debts, but rent during the stay won’t be charged against you. If you don’t have any assets over the amount of your homestead exemption, all of your past rent will be discharged.

If you choose to assume the lease, you must repay all back rent and deposit the next month’s rent immediately with the court. If you don’t pay off the past rental payments, the landlord can evict you.

Bankruptcy Laws Become More Complex

The normal bankruptcy laws have been changed to protect people from the economic consequences of Covid-19. It’s more important than ever to consult a bankruptcy attorney to see how you can keep your home.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.