Friday, May 6, 2011

Can I keep my house if I file for bankruptcy?

What you can keep in a bankruptcy case depends on what Chapter you file and where you live.

In many, many instances, bankruptcy allows you to keep your house and is the only tool to allow you to keep your house.

Normally, in a Chapter 7 case, you can keep whatever you can exempt under the allowed "exemptions". 
An "exemption"  is something that you may keep, regardless as to how much money you owe to creditors. 
There is a State Exemption scheme in many states and there is a Federal Bankruptcy Code exemption scheme applicable to all states. 

If you live in New Hampshire, where I practice, you can choose either (1) the State Exemptions or the (2) Federal Exemptions.  If you go to my prior articles, click on "exemptions", and it will tell you what you can exempt under the Federal or State Exemption schemes.

Under the New Hampshire State Exemptions, you have a homestead exemption of $100,000.  Under the Federal Bankruptcy Code exemptions, you can exempt $21,625 in value of your home.

So, if you own a home worth $250,000 and owe $150,000 on the mortgage, you have an equity cushion of $100,000.  Under the New Hampshire State Exemptions, you could protect all of the equity in your home (remember, there is a $100,000 homestead exemption) and go through Chapter 7 without the bankruptcy trustee touching your home.  You can keep it.  The only issue is then between you and the mortgage holder on your home.  If you are current in your mortgage payments, then regardless as to whether you file Chapter 7, the mortgage holder cannot foreclose on your home as long as you are current in all of your obligations under the mortgage. Many people who are overwhelmed by credit card debt or medical bills, stay current on their home mortgage payments, and file Chapter 7 to get rid of the credit card debt and medical bills - and still keep their home. 

If you are not current on your mortgage payments, then the lender may foreclose - but you still get to keep the surplus proceeds over and above what you owe on the mortgage on any foreclosure sale of your home.

In Chapter 13, you would still choose either the State or Federal Exemption scheme. However, as long as you make the Chapter 13 payments under your Chapter 13 re-payment plan, you can normally keep ALL of your assets. 

The reason you list the exemptions in Chapter 13 is to figure out how much equity you have in your assets after application of exemptions.  Why? Because, in Chapter 13, under your repayment plan you should pay your unsecured creditors (nomrally credit card debt or medical bills) the same percentage they would receive if you liquidated all of your assets after application of the exemptions - essentially, pennies on the dollar spread over the life of your Chapter 13 re-payment plan.

Many people file Chapter 13 because they are behind in their mortgage payments and just cannot catch up, but they want to keep their home.   Chapter 13 gives the home owner the opportunity to keep their house. 

Let's say Mrs. X pays $1000 monthly to her bank for her mortgage but she was out of work for a few months and fell behind 4 payments - she now owes the bank $4000 in past-due payments, called "mortgage arrearages".  She tries to get a loan modification, but the bank just will not work with her.  Mrs. X tells the bank she can still make her $1000 monthly mortgage  payment if they would just let her spread out the $4000 she owes in mortgage arrearages over time.  Mrs. X says to the bank, if you just let me spread the $4000 I owe in back payments over 36-months, I can catch up.  The bank says "no". They tell her they are going to foreclose on her house.

[When a bank says the "f" word ("foreclosure") - take action.  Please click on the articles under "foreclosure" on my blog to learn more about foreclosure - because in New Hampshire, the bank normally does not have to take you to court to foreclose on your home and you can be on the street in a matter of months.]

Mrs. X can force the bank to take her deal by simply filing Chapter 13 and sucessfully completing  the same 36-month re-payment plan!

1 comment:

  1. Valuable Information.It will very helpful to everyone who wants to file for bankruptcy.

    Thanks for sharing this information with us!