If you’re behind on your mortgage payments or carry any other substantial debts, and debt collectors are harassing you, filing for bankruptcy may be the solution. It can help you resolve your financial difficulties, rebuild your credit, and start the trail toward a positive financial status.
Most people who consider bankruptcy worry about losing their homes. Upon filing, an automatic stay will give you temporary breathing room by preventing creditors from initiating recovery action against you.
Whether you can keep your home through bankruptcy will depend on your situation, the bankruptcy chapter you select, and your state’s homestead exemption. Here are some of the steps you could follow to protect your home during bankruptcy.
Choose the right type of bankruptcy to file
Are you uncertain about which type of bankruptcy is appropriate for your situation? Chapter 7 is also known as liquidation bankruptcy.
It allows most of your debts to be discharged or canceled. When you file for Chapter 7 bankruptcy, the court will issue an automatic stay, which bars creditors from demanding payments from you.
However, you cannot discharge certain specified debts under Chapter 7. Your property will eventually have to be sold, if necessary to pay off your debts. Thus, if you own a home, you risk losing it.
If you decide to file a Chapter 13 bankruptcy, you should be aware that your debts will not be eliminated. Instead, you will be expected to negotiate a plan for how to repay the debt. The advantage of Chapter 13 bankruptcy is that you will be allowed to keep your property, including your home.
Understand your obligations under a particular chapter of bankruptcy
When you file under Chapter 7, the bankruptcy trustee will sell your non-exempt assets and distribute the proceeds to your creditors to reduce your qualifying debt. Chapter 7 bankruptcy does not provide a way for you to make up for mortgage arrears.
You will eventually lose your home if you cannot work something out with the mortgage lender.
By contrast, Chapter 13 bankruptcy allows you to keep your property: You will not automatically lose your home. However, it can be costly to keep your residence under Chapter 13.
You will only be fine if you are current on your mortgage payments and cover your equity with bankruptcy exemptions. When you file for Chapter 13 bankruptcy, you must prove you have adequate income to cover the monthly house payments.
Consider bankruptcy and homestead exemptions
Bankruptcy law protects some of your property from the reach of creditors via various exemptions. If your home is entirely exempt, the bankruptcy trustee cannot take it.
Most state and federal bankruptcy exemptions allow debtors a homestead exemption. This allows you to retain some of the equity in your primary residence. State exemptions vary greatly from state to state.
Normally, the homestead exemption protects your equity up to a certain point. However, some states have laws that help protect property better than what is available under the federal bankruptcy laws. For instance, Florida residents enjoy unlimited homestead exemptions.
Under both Chapter 7 and Chapter 13 bankruptcy, the court will consider the equity you have in your home before deciding whether to allow you to keep it.
Hire a bankruptcy attorney
For most people, the home is their most significant asset. It’s critical to ensure you don’t make a mistake, especially one that could cost you your house or condo. A bankruptcy attorney can review your situation and describe the suitable options.
Filing for bankruptcy is a complicated process, especially if you are worried about being able to keep your house. If you are wondering “should I file for bankruptcy?” your first step should be to consult an attorney.
It is crucial that you understand the various exemptions that may apply to your property.