Recently, on our bankruptcy forum a user asked, “I was told that if I have equity in my home I cannot declare bankruptcy. Is this true? What are my options if I own a home?”
The good news is that if you have decided Chapter 7 bankruptcy is the best decision for you and you own a home it is likely you may be able to keep your home. In general, if you have equity in your house and the equity is exempt or protected by your state’s bankruptcy exemptions or the federal bankruptcy exemptions laws, assuming you are able to keep making your mortgage payments, you will be able to keep your home.
Home equity and exemptions under bankruptcy law
Let’s take a little closer look at the question of equity and your ability to keep your home. When filing Chapter 7 bankruptcy the question of the amount of equity you have in your home will be a determining factor in whether you’ll be able to keep it.
The good news is that all states allow debtors to keep some of their property. The amount you can keep is determined by bankruptcy exemptions laws, which vary by state. If you own a home and you have no equity in the property, which means the home’s fair market value is less than the mortgage loan, you will be able to keep your house (assuming you are able to make your mortgage payments).
If, however, your mortgage is less the value of the home, you have equity, and it is time to make additional considerations and review your state’s exemption rules. For instance, in the state of Texas debtors are allowed an unlimited homestead exemption for a residence on 10 acres or less in a city, town or village or 100 acres or less in the country. This means if you decide to file Chapter 7 bankruptcy in Texas you will be allowed to keep your primary residence, regardless of its value (assuming you continue to make your mortgage payments).
Other states, however, do not have such generous mortgage exemption laws. In these states if the equity in your home is well above the allowable exemption the trustee is likely to sell your home and use the proceeds from the sale to repay your creditors.
What happens to my mortgage after the bankruptcy?
Although filing Chapter 7 bankruptcy will eliminate many types of unsecured debt obligations, it will not eliminate your mortgage lien, which is a secured debt. If you fail to make mortgage payments and breach the terms of your contract with the home mortgage lender, they have the right to the property.
The good news is creditors generally do not want to foreclose on homes or repossess property. They much prefer that you continue to make the mortgage payments and keep the home. With this in mind, you may have options if you are behind on your mortgage payments. Contact your lender immediately to discuss your situation.
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