Filing for bankruptcy doesn’t necessarily mean that you’ll have to give up your house. Although some people might have to give up some property to satisfy their creditors, bankruptcy can also be a powerful tool to protect property. Ultimately, the fate of your house in a bankruptcy depends on several factors: the value of your house compared to the amount of equity you can protect, whether you’re behind on your house payments when you file, and the type of bankruptcy you choose.
Continue Making Your House Payments
If you want to keep your house, you’ll have to continue making payments on it. If your payments are current when you file bankruptcy, you’re in good shape. You probably won’t have to do anything other than be sure to continue making timely payments. If your payments are behind, and you can’t get caught up right away, you might consider filing a Chapter 13 case, which will allow you three to five years to pay the past due amounts.
The Homestead Exemption Protects Equity in Your House
The bankruptcy laws allow every individual debtor (the person who files the case) to protect certain types of property that will help them regain financial stability after the case concludes. But it isn’t automatic. Besides making your house payments each month, to keep your house, you’ll have to declare an exemption for it.
Exemptions protect your equity (the market value of your home less your mortgage and other liens). The amount of equity you’re allowed to protect varies by state. In some states, the value may be as low as $5,000. In a few states, you can exempt all the equity in your home, subject to a cap of $160,375 (as of May 2017) if you have owned a house in your state for less than 40 months.
(To learn more, read Keeping Property Using Bankruptcy Exemptions: You Don't Lose Everything.)
When You Can’t Exempt All of Your Equity
If any of your equity is nonexempt, you may still be able to keep your house if you can come up with the value of the nonexempt portion another way. How that works depends on the type of type of bankruptcy you file.
Chapter 7 Bankruptcy
Having nonexempt equity doesn’t automatically mean that the bankruptcy court will sell the property to pay your creditors in a Chapter 7 bankruptcy. The bankruptcy trustee, who is appointed by the court to oversee your case, has to consider the costs of sale, the mortgage payoff, the cost of any other liens like property taxes, the amount of your exemption, and the trustee’s commission. After these items get paid, the amount left must be enough to make a worthwhile distribution to unsecured creditors. Many trustees won’t attempt to liquidate an asset that will net less than $5,000 (although you shouldn’t count on this).
Example. Suppose that your house is worth $150,000, your equity is $43,000, and your state allows you to exempt $20,000. The cost to sell the house will be $15,000, leaving $12,000 for unsecured creditors (and to cover the trustee’s commission). To keep your house, rather than have the trustee sell the property, you could substitute exempt property worth $12,000 for the nonexempt equity (if the trustee agrees). Or, you could borrow that amount or accept a gift from a generous friend or relative.
Chapter 13 Repayment Plan
When you file a Chapter 13 case, you won’t have to sell your property. But you will have to add the value of the nonexempt portion (the amount you can’t protect with an exemption) to your plan payments.
Example. Consider the same scenario as above. Instead of having to come up with the $10,000 at one time, the Chapter 13 trustee would require that you add $12,000 to the amount you’d have to pay through your plan.
If your payments are past due, Chapter 13 bankruptcy can help you save your home from foreclosure. For the Chapter 13 case to work, you’ll have to be in a position to make your regular monthly mortgage payment and fund a monthly repayment plan for your past due house payments, income taxes, alimony, child support, or other debts that are considered to have priority. Your plan will also have to cover necessary expenses.
Example. Before filing your Chapter 13 case, you owe six payments of $2,000, for a total of $12,000. Starting on the next regular payment date (usually the first of the next month), you’ll make your monthly payment. You will also start making your plan payments, usually within 30 days of filing your case. At a minimum, your plan will include the $12,000 plus a commission of about 10% for the Chapter 13 trustee who will administer your plan. Your payments can then be stretched out over 36 or 60 months.
Losing Your House After Falling Behind on Chapter 13 Payments
You have to be careful to keep your regular house payments and your plan payments current during the Chapter 13 case. In some jurisdictions, you’ll pay your house payment through the Chapter 13 bankruptcy trustee (commonly called a conduit plan). Courts that require a conduit plan believe that it helps debtors to keep current on their obligations.
If you’re not in a jurisdiction with a conduit plan, you must make your house payments directly to your lender. If you fall behind on either your plan payment or your house payment, the lender can file a motion and ask the court to lift the automatic stay (an injunction that prohibits collection activity during the bankruptcy case) so that it can move forward with foreclosure or other collection efforts.
Questions for Your Attorney
- If I file Chapter 7 bankruptcy, do I have to worry about the trustee selling my house?
- If I decide I don’t want my house after bankruptcy, can I surrender it to my lender?
- Can I sell my home while in a Chapter 13 bankruptcy?