It’s a common fear around filing for bankruptcy — that it means you’ll lose your house. While it’s true that can happen, it’s by no means a foregone conclusion. Here’s what you need to know about the impact of bankruptcy on your house.
Whether you can keep your house or not will depend on a number of factors: the type of bankruptcy you choose, if you’re current on your mortgage, how much equity you have in your house and your state’s laws.
Keeping your house depends on where you live
“It’s very, very state-specific,” says debt relief expert Michael Bovee, who is the co-founder of debt relief company, Resolve. “If you live in Florida or Texas, you’re in good shape, but in some states, you could be out of luck.”
That’s because with a bankruptcy, you’re allowed to exempt (up to a certain dollar amount) certain assets like your home, car, jewelry and household goods. But how much you can exempt varies quite a bit from state to state.
Home equity exemptions by state
If you want to keep your home in a bankruptcy, first look at your state’s laws to see how much equity you can exempt. (See a list of homestead exemptions by state here.)
The amount of equity you have in your home is the difference between the current market value of your house and how much you have outstanding in loans or liens. So if your house’s market value is $200,000, and you have $100,000 left on your mortgage, you have $100,000 of equity in your home.
That’s where your state’s homestead exemption laws come into play. If you have $100,000 of equity in your home, and you live in Wisconsin, where the homestead exemption is $75,000, that would leave $25,000 of unprotected equity. In that case, your home would likely be sold to repay some of your debts in a Chapter 7 bankruptcy. But if you had $15,000 worth of equity in your Wisconsin home, then all of your equity would be exempt and your house wouldn’t be sold.
It’s not common, but some states, including Florida and Texas, allow you to exempt all of the equity in your home if your property is under a certain acreage. Most states, though, have a cap. Meanwhile, a few states, such as Pennsylvania and New Jersey, don’t allow home equity exemptions at all. You do have the option of choosing the federal bankruptcy exemptions instead. The federal homestead exemption is $25,150.
Chapter 7 vs. Chapter 13 bankruptcy: Pros and cons
There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. Chapter 7 is known as a liquidation bankruptcy, meaning your unprotected assets are sold to repay some of your unsecured debts like credit card or medical debt. To be approved, you have to pass a means test to show that your income is low enough, and your expenses high enough, to justify filing for Chapter 7.
Related article: Bankruptcy: The differences between Chapter 7 & Chapter 13
If you make too much money, you may have to file for Chapter 13 instead. This type of bankruptcy is known as a wage earner’s plan. Your assets aren’t sold to repay your debts; instead, you’re put on a three-to-five-year repayment plan to discharge some of your debts. You need a steady income to be approved for Chapter 13. One benefit of Chapter 13 is that if you’re behind on your mortgage payments, you have a chance to catch up.
If you don’t have much equity in your home, you’re current on your mortgage and your state’s laws allow you to exempt a fair amount of equity, you’ll probably be able to keep your home in a Chapter 7 bankruptcy. Bovee rarely recommends filing for Chapter 13 — a much more expensive, time-consuming and less successful option. The one main exception, he says, is a case where someone has a lot of equity in their home that isn’t protected by their state’s laws.
Related article: How to file Chapter 13 bankruptcy
Although you aren’t required to liquidate any of your assets in a Chapter 13 bankruptcy to repay your debts, the value of your nonexempt property still counts. The courts will first determine your disposable income (how much money you have when your expenses are deducted from your monthly income) and then the value of your nonexempt property, including any unprotected home equity. Over the course of your repayment plan, you would have to repay your creditors whichever amount is higher.
With both Chapter 7 and Chapter 13 bankruptcy, you’ll need to stay current on your mortgage payments if you want to keep your home. But it’s good to know that keeping your house and filing for bankruptcy can both happen. Part of how successful you’ll be depends on where you live.
Related article: 6 steps to rebuild your credit after bankruptcy
How Resolve can help
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