The Basics of Bankruptcy Protection for Homeowners

The basics of bankruptcy protection for homeowners can be different than for people who do not currently own their own home. The most important basic of bankruptcy protection is not let yourself feel all warm and cozy by that powerful word, "protection". Yes, a bankruptcy can help a homeowner work their way through unmanageable debt and get a fresh start, but the protection and fresh start come at a huge price to your credit, stress level and your future for years to come.

Basic #1: Credit Counseling

If you decide to file bankruptcy, you are going to be required to complete a credit counseling course anyway so why not find one now and enroll? You may learn new strategies for budgeting and debt handling that can help you get back on track and  avoid filing bankruptcy.

Be careful to locate a HUD or similarly certified credit counselor and be wary of companies that promise to eliminate or reduce your debt for a fee. This is most likely a scam. You can't take a pill and wake up younger and thin tomorrow and you can't pay someone to magically erase your debt mistakes either.

Basic #2: Chapter 7 or Chapter 13?

Two common forms of bankruptcy filed by individuals in the United States are Chapter 7 and Chapter 13. Which one is best for you depends entirely on your personal situation.

• Chapter 7 (Liquidation) is when a court appointed trustee takes all of your assets (except those you are allowed to keep under Federal and State law), sells your assets and uses the money to pay creditors. As a homeowner, you should be aware that you are less likely to keep your home under Chapter 7.

• Chapter 13 (Adjustment of Debts) is when your debt is reorganized and you make court supervised payments to your creditors over a period of time, usually three to five years and you are more likely to keep your home.

Basic #3:  Where You Live Matters

Although Bankruptcy Code is Federal law, that law in turn allows each state to create its own rules regarding bankruptcy. One of those rules called the "Homestead Exemption" under Chapter 7 bankruptcy is really important to know for your state, because as a homeowner the amount of home equity you are allowed to keep will directly translate into whether or not you can keep your home in bankruptcy.

Some states allow you to only keep $5,000 in home equity while others allow up to the Federal limit of $125,000. The value of other assets you are allowed to keep such as your car, clothing, household goods and jewelry varies state by state as well.

Basic #4: Get Legal Help Now

Even if you are only considering your options, and have just begun to wonder if bankruptcy is your best path, as a homeowner you should talk to an experienced bankruptcy attorney. They have the skills and knowledge to answer your questions and guide you either through the bankruptcy process or suggest reputable credit counselors for you to work with.