Keeping Your House and Car in Bankruptcy

Secured debt is debt in which the borrower pledges a specific asset, such as a house or a car, as security for the loan. A loan for a house or a car is secured debt. If the debtor defaults on the loan, the creditor can take the asset and sell it. Depending on whether a debtor files for Chapter 7 or Chapter 13 will determine whether the debtor can keep their house and car.

What Happens to Your House in Bankruptcy?

In Chapter 7, a debtor may be able to keep their home if they are current on their mortgage However, a debtor can lose their house if the equity in the home exceeds the homestead exemption in their state. If unprotected equity exists, the trustee can sell the home and pay creditors with the proceeds. If the sale of the home will not produce enough money to pay unsecured creditors, it is not likely that the trustee will sell the home.

If the debtor is not current on their mortgage, filing for Chapter 7 may not be the best option for keeping a home. Chapter 7 will only temporarily stop foreclosure proceedings. A lender can request that the court lift the stay in order to continue foreclosure proceedings. The debtor can save their house by curing the default or by filing for Chapter 13 instead. Chapter 13 will halt foreclosure proceedings and will allow the debtor to keep the home if the debtor is able to pay back the past due amount in the Chapter 13 repayment plan.

What Happens to Your Car in Bankruptcy?

In Chapter 7, the trustee will sell a debtor’s car to pay creditors if it will produce enough money to pay unsecured creditors. If a debtor has a car loan and the trustee chooses not to sell it or the equity in the car is exempt, the debtor can keep the car by choosing to redeem or reaffirm the debt. A debtor can redeem the car by paying the creditor the actual value of the car. If the debtor chooses to reaffirm the car note, the debtor must agree to continue making payments according to the original agreement.

In Chapter 13, a debtor can keep their car if they are current on the loan or if the debtor will pay the past due amount in the Chapter 13 repayment plan. The debtor can also reduce the amount owed on a car note by using the cram down option. If the debtor purchased the car more than 30 months before filing, the debtor can strip the lien to the present value of the car. This means that the debtor will only pay the creditor the actual value of the car, plus interest.