For most people, their home is their most valuable and important asset. When a person files for Chapter 7 bankruptcy, there is a chance that they could lose their home if there is nonexempt equity or if they are behind on their mortgage payments. In cases where the debtor is in default, some mortgage lenders may be willing to renegotiate the terms of the mortgage. If the debtor does not have nonexempt equity in the home and the debtor is current on the mortgage, Chapter 7 will not result in the loss of the home.
Will the Homestead Exemption Protect Your Home?
If the equity in your primary residence does not exceed the homestead exemption, you may be able to keep your home in Chapter 7. This exemption protects a certain amount of equity—determined by each state—in the home. This means that the homeowner can keep the exempt equity. If there is nonexempt equity, the trustee can sell the home. The trustee will use the proceeds from the sale to pay the mortgage lender, lien holders, expenses incurred from the sale, property taxes, and unsecured creditors. If the sale of the home will not produce enough proceeds to pay unsecured creditors, the trustee will not sell the home.
Why You Should Keep Making Your Mortgage Payments
If you file for Chapter 7 bankruptcy, it is important to continue making your mortgage payments. If a debtor gets behind on their mortgage payments, a mortgage lender can ask the bankruptcy court to lift the automatic stay—a court order that prohibits creditors from engaging in collection activities against the filer—so that the lender can begin foreclosure proceedings. Courts routinely lift stays in Chapter 7 when a debtor has missed mortgage payments. The lender can also wait until the bankruptcy becomes final, and then begin foreclosure proceedings. The best way to protect your home is to remain current on paying the mortgage.
If You’re Behind on Your Mortgage
If you are behind on the mortgage, you can try to work out a payment arrangement with the mortgage lender. Some lenders would rather renegotiate payment terms than have to foreclose on the home. Many lenders have the following in-house workout options: repaying the past due amount over a few months, a temporary suspension of regular payments, or extending the term of the loan. Many lenders are also participating in federal modification programs that allow qualified debtors to refinance or modify their mortgage. These programs are described in detail at www.makinghomeaffordable.gov.
Protecting your home in bankruptcy can be complex and may require a consultation with a bankruptcy attorney. A bankruptcy attorney can help assess your situation and offer solutions to any potential problems.
