When you’ve made the decision to file for bankruptcy to resolve your financial issues and give yourself a fresh start, you likely will have many questions about how bankruptcy will affect your life. One of the most important questions many people have when they file for bankruptcy is whether they’ll end up losing their home during the process. Whether a debtor will be allowed to keep their home in bankruptcy depends on multiple factors, most importantly, the type of bankruptcy they file for.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as liquidation bankruptcy because, in this type of bankruptcy, a debtor is expected to liquidate, or sell, all non-exempt assets they own to generate cash that is used to pay off as much of their debt as possible. Despite the nature of a Chapter 7 bankruptcy, a debtor may be eligible to keep their home under the following circumstances:
- The debtor is current on their mortgage payments. Since Chapter 7 bankruptcy doesn’t allow a debtor to catch up on their payments and because a mortgage, as secured debt, won’t be discharged at the end of the proceeding, mortgage lenders are typically allowed to continue foreclosure either during or after the bankruptcy.
- The debtor can afford to continue making mortgage payments following bankruptcy. If a debtor can’t afford their mortgage after bankruptcy, they may end up losing their home through foreclosure since they must observe a waiting period before filing for another bankruptcy.
- The debtor either has no equity in the home or can protect their equity using an exemption. If a Chapter 7 debtor has no equity in their home due to being underwater on their mortgage (the balance of the mortgage is greater than the value of the property), the bankruptcy trustee likely will not sell the home as part of the liquidation process since no money would be received from the sale. If the debtor does have equity in their home, they can avoid having to sell their home if they can use one or more exemptions under federal bankruptcy law or state exemption statutes, such as a homestead exemption or wildcard exemption, to keep the value of that equity.
Chapter 12 Bankruptcy
Chapter 12 bankruptcy is utilized by family-run farming or fishing operations to reorganize their finances. Therefore, Chapter 12 bankruptcy can only be used to reorganize business debt. The home owned by a farming family is typically unaffected by a Chapter 12 bankruptcy.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as a wage earner’s plan, operates differently from Chapter 7 liquidation bankruptcy because a Chapter 13 debtor gets to keep all their assets. This means a Chapter 13 debtor will be allowed to keep their home during bankruptcy. However, in order to be eligible to file for and proceed with a Chapter 13 bankruptcy, a debtor will need to file a plan with the bankruptcy court that shows the debtor can afford to pay off all debts that must be paid in full during the term of the repayment plan, in addition to making regular mortgage payments (and making up any missed mortgage payments). If the debtor doesn’t have sufficient income to afford those payments, the court may terminate the Chapter 13 bankruptcy or convert it to a Chapter 7 bankruptcy.
Contact a Council Bluffs Bankruptcy Lawyer Today
If you have more questions about your rights and options for keeping your home in bankruptcy, turn to the Council Bluffs bankruptcy attorneys of Telpner Peterson Law Firm, LLP, for help. Contact our firm today at 712-309-3738 for a consultation with a knowledgeable member of our legal team. Learn more about how we can help you protect your home and your assets to the best extent possible if you decide to file for bankruptcy.