It’s possible to keep a home when you file for bankruptcy, but the circumstances must be right. You’ll need to be sure that you meet the requirements of the chapter you file. For instance, Chapter 7 filers must be current on payments and protect all home equity with a bankruptcy exemption. By contrast, Chapter 13 filers can catch up on missed mortgage payments and keep the home.
- protecting home equity in Chapter 7 and 13
- keeping a home in Chapter 7
- catching up on past-due payments in Chapter 13, and
- removing liens and lowering mortgage payments in Chapter 13
Protecting Your Home Equity in Chapter 7 or Chapter 13 Bankruptcy
Start by determining whether you can protect all of your home equity in bankruptcy. You must complete this critical step in both Chapter 7 and Chapter 13 bankruptcy.
In both bankruptcy chapters, you protect an asset with a bankruptcy exemption. You can check the Georgia bankruptcy exemptions to see how much equity you can protect in your home to avoid a trustee selling it to pay your creditors.
Here’s how the homestead exemption works in Chapter 7 and 13.
- Chapter 7 case. Suppose the exemption isn’t enough to cover the entire amount of your equity. In that case, the Chapter 7 court-appointed trustee will sell it and use the proceeds above your exemption amount to pay off some of your unsecured debt, like credit cards and medical bills.
- Chapter 13 case. Chapter 13 bankruptcy works differently. You are not forced to give up any property. Instead, you will have to pay for the nonexempt portion of the equity in your plan. Here in the Northern District of Georgia, the trustee’s will also deduct a 10% cost of sale from the total amount to be paid.
Example. You have $100,000 in equity in your house, but the maximum amount you can exempt is $43,000 for a married couple filing in Georgia then you’ll have to structure your Chapter 13 payment plan so that your unsecured creditors will receive at least $57,000 over the life of the plan. That amount is in addition to any other debts your plan payment must cover, like mortgage arrearages and car payments.
Keeping Your Home in Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is often more attractive because it’s simpler and gets you on the road to financial stability sooner because you don’t pay into a three- to five-year repayment plan.
You’ll be able to keep your house as long as you meet the following criteria:
- You are current on your house payments.
- You can protect all of your home equity with a bankruptcy exemption
- You’ll be able to continue making your payments in the future.
Chapter 7 bankruptcy does have some limits as a tool for managing mortgage debt, however. It won’t help you catch up on past-due payments, and it might be challenging to protect the house if you have a lot of equity in it. The bankruptcy trustee will sell it and use the nonexempt equity to pay other creditors, such as back taxes, credit card balances, and personal loans. Remember that the Chapter 7 trustee will get a commission on whatever they sell as part of the estate so they have a vested reason to find equity in the home. If the trustee’s real estate agent finds equity in the
Chapter 13 bankruptcy can be a better choice to address both those issues so you can keep the home. Chapter 13 might also allow you to get rid of second or third mortgages.
Chapter 13 Bankruptcy and Past-Due Mortgage Payments
If you’re behind on your mortgage payments and you want to keep the house, Chapter 13 bankruptcy provides a mechanism for helping you get caught up—something that Chapter 7 bankruptcy cannot do.
- Propose a repayment plan. In Chapter 13 bankruptcy, you propose a repayment plan that will allow you to pay your creditors over three to five years. You can treat your mortgage arrearage as a separate debt and add it to your payment plan. Once your case is filed you then resume making normal monthly payments.
- Sufficient income to fund your case. If you use Chapter 13 to catch up on your mortgage arrearages you have to show that you have the income to make both your regular monthly mortgage payment and your plan payment to the Chapter 13 trustee while you’re in the case.
While you are in a Chapter 13 case, the mortgage holder cannot foreclose on your home if you continue to stay in the case and make your monthly trustee payments.
Using Chapter 13 Bankruptcy to Remove Junior Liens
If you have a second or another junior lien on your home (NOT a rental property), you might be able to get rid of it through a process called “lien stripping.” Lien stripping is available only in a Chapter 13 case and only when your property is worth less than the primary loan balance. If you have even $1.00 worth of equity in the second mortgage or lien then you cannot strip off the junior lien.
To strip the lien, a formal motion has to be filed in the bankruptcy court and you will have to present evidence on the property’s value (usually an appraisal) and the mortgage loan balances. If the court voids the junior lien, the debt you owe to that creditor will be treated in the Chapter 13 case as if it were unsecured. Any remaining balance will get wiped out with other qualifying unsecured debt at the end of the case. One thing though you have to remember is that you need to be in a Chapter 13 plan were you are NOT repaying all unsecured debts back in full, otherwise this would be waste of time.