Filing for bankruptcy is followed by a tricky balance between your assets, what you have and how much you can afford to pay. Most people are worried about keeping their house if they file for bankruptcy. For example, Chapter 7 bankruptcy focuses on liquidation. So, many individuals shy from filing bankruptcy for the fear that a bankruptcy trustee will sell their home.
Unknown to many, you have several options to ensure you retain your home and car even after filing for bankruptcy through exemptions. Our guide will include everything you need to know about keeping your home after filing bankruptcy. We will also explain exemptions and how they work.
1. How Bankruptcy Exemptions Can Help Keep Your House When Filing for Bankruptcy
Bankruptcy exemptions refer to laws that help individuals protect their property in bankruptcy. Exemption laws exist in state law and the Bankruptcy Code at the federal level. The exemptions in state laws protect the property even without filing a bankruptcy case. Exempt property cannot be sold to repay unsecured creditors. However, you need to claim appropriate exemption when filing your petition to protect your assets.
Failing to claim exemptions or claiming the wrong amount of exemption can result in losing your property. Exemption laws exist to level the playing field and give individuals a chance to protect their property so they don’t need to start from scratch when the court grants them a fresh start.
If you want to keep your house, you can claim bankruptcy exemptions. Homestead exemptions can sometimes be complicated. However, you can use an online bankruptcy exemptions calculator to see if you are at risk of losing your home depending on the bankruptcy exemptions laws and limits in your state.
If you would like to protect the equity in your property when filing for bankruptcy, you can use exemptions. There are different bankruptcy exemptions for assets like homes, cars, government benefits, retirement accounts, clothing, and other personal property. Here are homestead exemptions at the state and federal law;
A. State Homestead Exemptions
Each state is allowed to pass state bankruptcy exemptions under the Federal Bankruptcy Code. So the exemptions vary by state, and you can choose to use either federal or state bankruptcy exemptions. Check your state homestead exemptions where you can also take a bankruptcy exemptions calculator that helps you understand whether your home is at risk.
B. Federal Homestead Exemptions
Exemption protection by the state differs from those offered under federal bankruptcy. For example, in Florida, the homestead exemption is unlimited. Thus, your home may be protected even after you file for bankruptcy, irrespective of the amount of equity. Currently, the current federal homestead exemptions as of 1st April 2019 are $25.150. The exemption is doubled in the case of a couple filing joint bankruptcy to $50,300. Federal bankruptcy exemptions are reviewed and adjusted every three years. Here are the federal bankruptcy homestead exemptions.
Here is a list of states which allow bankruptcy filers to choose federal exemptions;
- Alaska
- Connecticut
- Kentucky
- Arkansas
- Hawaii
- Massachusetts
- New Hampshire
- Texas
- Oregon
- Minnesota
- District of Columbia
- New Mexico
- Michigan
- Wisconsin
- New Jersey
- Pennsylvania
- New York
- Vermont
- Rhode Island
- Washington
2. Can I Keep both My House and Vehicle If I File for Bankruptcy?
You can often keep your house even after filing for bankruptcy and potentially even your car. However, you need to have a full understanding of bankruptcy exemptions. First, you need to calculate the net equity in your house. Subtract the mortgage payoff and other valid liens from the house’s current market value.
For example, assuming your house is worth $90,000 and you have an outstanding mortgage of $70,000, the net equity is $20,000. If you choose to apply for the federal bankruptcy exemption, currently at $25,150 for homestead, your home equity can be protected if you file for bankruptcy relief. If you intend to file bankruptcy as a couple, remember that the exemption doubles if you are both on the title to the house.
When filing for bankruptcy, you will have to submit a copy of your assets. So, before filing, it is wise to seek the services of a bankruptcy attorney. The attorney will review your property and analyze them against bankruptcy exemptions. If the attorney notices there is a high risk of losing your assets if you file for bankruptcy, they will discuss the risk with you to ensure you make an informed decision. In most cases, your attorney will present other debt-relief options to get out of debt without risking your property.
Your age can also determine if you get to keep your home. For example, if you are a senior and would like to file for bankruptcy, you have more options to keep your home. Since retirement income is untouchable in bankruptcy, you can use the homestead exemption to avoid losing your home as a retiree.
Suppose My Equity Exceeds the Exemption Limit, Can I Keep My House?
If the exemption laws are too little to fully cover your home’s equity, you have too much equity in your house. The excess equity may be prone to liquidation to cater to unsecured creditors. Under chapter 7, the trustee can liquidate the excess equity and distribute it to creditors. However, this is not always the case.
Sometimes, the trustee doesn’t liquidate property, even with excess equity. They determine if liquidation is worth the expense and time. Trustees calculate the cost of liquidation to how much equity they can extract. So, if the liquidation leaves little equity, the trustee may choose not to seize the property.
But, you can never be too sure if the trustee will sell the excess equity. So, if your amount of equity is higher than the exemption, you can keep your house by considering alternative debt relief options. Use an online debt-relief options comparison calculator to get an overview of other options, their advantages, disadvantages, and how much they cost.
3. Reasons Why People Lose Their Homes after Filing Bankruptcy
Despite the option to use exemptions to protect homes, some people may lose their homes after filing bankruptcy in some cases. For example, if you file for bankruptcy, and the court doesn’t discharge the mortgage, and you don’t have enough to pay your mortgage, you might need to surrender your home.
Although people perceive losing a home as a negative thing, sometimes, it is helpful. If you cannot afford mortgage payments, surrendering your home avoids a deficiency judgment. It is considered a deficiency when your lender decides to foreclose your home after falling behind on your payments and the money obtained at a foreclosure sale doesn’t pay the mortgage in full. You will owe the mortgage company the deficient amount. A deficiency judgment could result in you owing to your lender more, even after a foreclosure. Fortunately, filing for bankruptcy avoids deficiency judgment.
People whose equity is more than the bankruptcy exemptions can also lose their homes if the trustee decides to sell the house and use the unprotected equity to repay unsecured creditors. This happens in Chapter 7 bankruptcy which uses liquidation to repay your debts. When the trustee decides to sell the non-protected equity, they will use the proceeds to pay the mortgage debt fully and later pay the home exemption to the debtor, and the remaining amount will be used to pay unsecured debtors.
4. Do I Risk Losing my House if I File Chapter 13 Bankruptcy?
Chapter 13 bankruptcy works differently from Chapter 7. So, if you realize you have higher equity in your home than bankruptcy exemptions, you can choose to file Chapter 13 to avoid foreclosure. Chapter 13 bankruptcy allows you to reorganize your debt payment plan. You can therefore catch up on outstanding mortgage payments over 3 to 5 years, allowing you to retain your home throughout the repayment duration
Under Chapter 13, you can also pay some additional amount to your creditors if you have too much equity on your home. You can pay a little extra monthly through your Chapter 13 repayment plan to ensure you keep your home.
One thing that you may consider is taking a Chapter 13 calculator that can help you estimate what your Chapter 13 plan payment would be if your house is above the homestead exemption in your state.
Can I Lose My Home If I Fall Behind on My Mortgage Payments?
Not always. However, you should always consult your lender if you realize you cannot pay your monthly payment. You might get them to negotiate a flexible payment plan until you get on your feet instead of waiting until your lender reaches out with a foreclosure notice.
Other Than Keeping My House, What Are the Other Benefits of Filing Bankruptcy?
Before filing bankruptcy to keep your home, you should consider its advantages and disadvantages. It is essential to seek the services of a local bankruptcy attorney before filing bankruptcy. An attorney can help evaluate your equity on your home to decide if filing bankruptcy is the best option for you. If your equity is too much, they can recommend other debt-relief options.
5. Alternatives to Filing Bankruptcy Where You May Keep Your Home
Let’s cover two alternatives to bankruptcy that may allow you to keep your home. I won’t discuss a HELOC or a reverse mortgage here because you may have already tried that route, and it hasn’t helped.
Home Co-Investment
Home co-investment is a newer alternative to bankruptcy. Let’s say you own $100,000 in home equity, but the exemption only allows you to do $25,000. In a Chapter 7 bankruptcy, the trustee may liquidate your home, and a Chapter 13 bankruptcy may be too expensive because of the home equity. In this case, you may be able to extract equity through home co-investment where a company invests in the equity of your home, so that when you sell your home, then there would be a share of the equity. That said, please look at the pros and cons of this option as this may require a lien put on your home.
If you are interested in this option, please feel free to check the link above.
Debt Settlement
Let’s say that you are 2 months behind on your home and do not want to file Chapter 13 bankruptcy. With debt settlement, you may be able to catch up on your home payments before starting your monthly drafts. This would allow you to negotiate and settle the debt and potentially avoid bankruptcy while catching up on your debt.
Please note that debt settlement has its own pros and cons, so you should cons such as: 1) Chances of lawsuit 2) Tax on unpaid debt. 3) Credit score impact
Should I file Bankruptcy If I Can Keep My Home?
Filing for bankruptcy is ultimately your decision. If you are interested, you can always get a free bankruptcy consultation with a local attorney to help you understand whether that option is the best option for you.
Finally, you may also want to examine the cost of filing bankruptcy as that can help you understand whether Chapter 7 or Chapter 13 bankruptcy is right for you when you know you can keep your home.