Can I Keep My Home in Bankruptcy?
UPDATED: May 21, 2020
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There are ways to keep a home when filing for bankruptcy. A bankruptcy automatic stay will prevent creditors from taking collection action against a person in bankruptcy and filing a bankruptcy petition will temporarily suspend any pending foreclosure action. An automatic stay will not last forever, but it will allow a debtor more time to review all of the available options.
Factors - Type of Bankruptcy Matters
From there, what will happen to a home in bankruptcy will depend on the type being filed, the amount of equity in the home, and whether the debtor owns the house jointly with someone else. It’s extremely important to consult with a bankruptcy attorney to review all of the options before deciding which type of consumer bankruptcy is best for your situation.
In a Chapter 7 case, while a debtor will lose assets but get rid of debts, they can either formally reaffirm the mortgage loan or, in some judicial districts, just keep making payments. If a person falls behind on payments, and has some equity in the home. If a debtor's home equity is larger than the state's homestead exemption, Chapter 7 is not the best choice as it would probably llead to the loss of the home.
Chapter 13 may be a better choice because it allows a debtor to pay off the arrearages (mortgage) over time and therefore face less risk of losing their home to the bankruptcy trustee. A critical consideration in a Chapter 13 case is whether a debtor whose home loan is in default can make the larger mortgage payments (the missed payments plus resuming the original payments) over the repayment period. (See this article on home foreclosures for more information on this subject).
Finally, if the home is owned jointly with another person, the type of ownership can affect how the home is treated during bankruptcy. If ownership is shared with a spouse, the community property laws in the state can limit or expand available exemptions. Filing jointly on the joint property may allow a debtor to protect a greater interest in the home. Because this aspect varies from state to state, it is very important to consult an attorney in the jurisdiction of the home before filing.