The journey to homeownership is often filled with dedication and perseverance — which is why deciding to part ways with your home can be difficult when considering a financial restart.
If you’re thinking about bankruptcy and want to keep your home during the process, the good news is that you’ll likely be able to. It all depends on the type of bankruptcy you file, whether you’re up-to-date on mortgage payments, and the amount of equity you have in your home. Below we’ll take a deeper dive and help you confidently answer the all-too-common question of, “If I file bankruptcy, what happens to my house?.”
Can you file bankruptcy and keep your house?
What happens after filing for bankruptcy largely depends on the type you file. Each can impact various aspects of your financial health differently, such as:
- How your debts and assets will be handled
- How long it will take to rebuild your credit
- Whether you can refinance your mortgage
- How long until you can purchase a new home
Here’s a look at how Chapter 7 and Chapter 13 can impact your ability to continue owning your home:
Chapter 7: Also known as liquidation bankruptcy, Chapter 7 is when you liquidate or sell your property — household goods, clothing, retirement funds, and cash — to repay most of your debts for a financial fresh start. With this type of bankruptcy, you can keep your home as long as you’re current on mortgage payments, can continue to make them for the foreseeable future, and can protect your home equity from creditors through a homestead exemption.
Chapter 13: Chapter 13, or wage earner’s bankruptcy, requires you to repay some or all of your debts during a three to five-year repayment plan. Since Chapter 13 allows you to catch up on past-due bills and debts, you can keep your home — even if you’ve fallen behind on payments. You’ll need to stay current on payments over the course of your repayment plan, but as long as you make them, you won’t lose your house.
How to keep your house after bankruptcy
An automatic stay: your initial protection
As soon as you file for bankruptcy, the court will issue an automatic stay. This will stop creditors from collecting on debts that you owe. It will also pause foreclosure proceedings and allow you to keep your home during your case.
Chapter 7: The pause on foreclosure will be temporary, usually a few months until your case is closed. It legally postpones the sale of your property during bankruptcy. However, there are unique situations in which a lender can trigger and force foreclosure. During automatic stay limbo, you’ll want to speak with your bankruptcy trustee about preserving your home.
Chapter 13: Since you’ll be entering a repayment agreement, the automatic stay typically lasts years. This will give you enough time to catch up on your arrears or past-due mortgage payments during the three to five-year repayment plan. You’ll also need to stay current on payments.
You’ll need to ‘exempt’ your equity to keep your home
Home equity refers to the difference between what you owe on your mortgage and what your home is worth. A homestead exemption is a legal protection that shields some or all of your home equity from creditors who want to sell it to repay your debts. The protected equity is referred to as exempt equity, and anything not covered is nonexempt equity.
While some states allow you to protect a few thousand dollars in equity, others enable you to preserve its entire value. There’s also a federal homestead exemption that a few states will allow you to use if it’s more beneficial in your unique situation.
Chapter 7: If the homestead exemption can cover all your home equity and you’re up-to-date on your mortgage, you can keep your home. In the event the exemption isn’t enough to cover all of your equity, your bankruptcy trustee may sell your house and use the proceeds to pay off debt. You’ll receive the homestead amount minus the sales costs and fees.
Chapter 13: Unlike Chapter 7, Chapter 13 requires you to pay the equivalent of your nonexempt property value through the repayment plan. In addition, you’ll have to pay your monthly mortgage payment, any late payments, interest, and trustee fees. As long as you can provide proof that your income can cover these costs, you can keep your house.
Enter a reaffirmation agreement
With a reaffirmation agreement, you promise to repay your mortgage debt that would otherwise be discharged in your bankruptcy case. This strategy can give you the chance to keep your home and improve your credit score through on-time mortgage payments.
Chapter 7: In Chapter 7, a reaffirmation agreement is voluntary. In this type of bankruptcy, you agree to pay back the debt so you can keep your assets. This will be necessary to keep your home.
Chapter 13: In Chapter 13, a reaffirmation agreement is the solution you agree to.
If you’re unable to make your mortgage payments after the reaffirmation agreement starts, your home may go into foreclosure. Therefore, you shouldn’t take the reaffirmation route unless you’re confident you can pay your mortgage.
Should you file for Chapter 7 or Chapter 13 bankruptcy?
Your unique situation will dictate whether you should file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy might make sense if you pass the means test, which looks at income, expenses, and family size. To pass the test and qualify for Chapter 7, your income can’t exceed a certain amount. This amount is based on
the median income in your state and your debts.
If you don’t qualify for Chapter 7 because your income is too high, you’re behind on mortgage payments, or you’re interested in restructuring your debt, Chapter 13 may be a better fit.
Bankruptcy: a last resort
Bankruptcy is intended to give you a fresh start and provide relief from creditors. However, filing for it can significantly damage your credit report for up to 10 years. It can also be quite expensive as you’ll have to pay for filing fees and attorney fees. If possible, you should avoid bankruptcy unless you’ve exhausted all alternative options.
If you’d like to keep your property, consider the following before moving forward with bankruptcy:
- Loan modifications: You can apply for a loan modification and ask your lender to change the terms of your mortgage so that it’s more manageable for you. They may adjust your interest rate and lower your monthly payments or increase the length of your mortgage.
- Loan forbearance: Loan forbearance is when your lender temporarily pauses your mortgage payments. At the end of the forbearance period, which usually lasts about six months, your payments will resume, and you’ll be responsible for the payments you missed.
Fortunately, there is a good chance you can keep your home when you file for bankruptcy. Factors like the type of bankruptcy you file, your home equity, and whether or not you can make your mortgage payments will all determine how bankruptcy will impact your status as a homeowner.
If you’re a homeowner looking to pay off debt or avoid bankruptcy, consider a Home Equity Investment (HEI) with Point. You can receive a lump sum of cash without having to worry about monthly payments. Instead, you’ll pay back the investment and a percentage of your home’s future appreciation anytime during a 30-year term.