Your Home in Bankruptcy

The issue of home ownership in a bankruptcy can be a complicated one. If you wish to keep your home, you can do so under both Chapter 7 and Chapter 13. Whether you keep your home under Chapter 7 is mainly dependent on whether the equity in your home is exempt or non-exempt under your state's bankruptcy laws. Chapter 13 is an often-used avenue to protect a home from foreclosure. However, if a home is encumbered with too many mortgages or liens that the home's debt is greater than the home's value, it may make more financial sense to simply walk away from the home.

Chapter 7 and Your Home

If your home has non-exempt equity with a value over and above the sum of your unavoidable secured debt, the home may be subject to the bankruptcy estate depending on your state's law as well as the cost of selling your home. However, if the equity in your house is exempt and you can continue to make payments on it, you can keep your home.

Note that although a Chapter 7 bankruptcy discharge eliminates your personal liability for the mortgage, it does not eliminate any lien attached to your home. Therefore, following a bankruptcy, the mortgage lender retains its rights to the property, including the right to foreclose if you breach the mortgage agreement. Failing to make payments according to a loan agreement is a breach, so you have to continue making payments. Most secured creditors do not want to take your home from you. However, if you are far behind in your payments, you should consider Chapter 13.

Chapter 13 and Your Home

If you are far behind on your mortgage payments the first step you should take is to seek to negotiate with your mortgage lender. Most lenders are willing to re-negotiate the mortgage terms depending on your credit history, your future financial prospects and the reason you have missed payments. Possible options to save your home include:

• A repayment of the missed payments spread out over a few months;
• A reduction or suspension of regular payments for a specified time after which a portion of the overdue amount will be added to your subsequent regular payments; 
• Suspension of payment of the principal for a specified time during which you only pay interest, taxes and insurance;
• Extension of the length of your loan with an addition of missed payments at the end;
• Refinancing your home loan to reduce future monthly payments; or
• Selling the property in a short sale for less than you owe the lender who will waive the rest.

However, in some cases, your lender will choose to foreclose, especially if your debt problems seem long-lasting. If you are facing foreclosure and want to keep your home, you should contact a bankruptcy attorney as soon as possible. Foreclosure generally takes between 90 to 120 days during which time you can file for Chapter 13. Chapter 13 will allow you to cure the default on your mortgage by making up your arrearage (missed payments) and continuing regular payments.

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Even if selling your home is unavoidable, a bankruptcy will allow you, through the trustee's supervision, to maximize the selling price. Additionally, in a bankruptcy you are entitled to the exempt cash portion of your homestead if there are proceeds remaining after secured creditors have been satisfied.

Talk with a bankruptcy attorney to discuss the issue of your home in bankruptcy.