Many people considering filing for bankruptcy worry about losing their homes. Some may be facing foreclosure; others might be managing their mortgage just fine but don't want to lose their home in bankruptcy.
The automatic stay will stop creditors and give all filers temporary breathing room, but whether you'll be able to keep your home will depend on your situation, your state's homestead exemption, and the chapter you file.
Learn about the differences between Chapters 7 and 13.
Bankruptcy's automatic stay prevents creditors from continuing collection actions after you file a bankruptcy petition, including foreclosure proceedings. However, lenders can ask the court to remove the automatic stay (called lifting the stay) and allow the lender to continue the foreclosure. If it is a foregone conclusion that you will lose your home—you can't immediately catch up arrears in Chapter 7 or show enough income to pay arrears over three to five years in Chapter 13—the court will grant the lender's motion. The lender won't have to wait until the bankruptcy case is over to foreclose on your home.
The Chapter 7 bankruptcy trustee will sell your nonexempt assets and distribute the proceeds to creditors in exchange for wiping out qualifying debt. Luckily, bankruptcy law protects some of your property from the reach of the creditor through bankruptcy exemptions. If the equity in your property is entirely exempt, the trustee can't take it. To determine how much equity you have in your home, subtract all mortgages and liens from your home's current market value.
The federal bankruptcy exemptions, and most state exemptions, provide debtors with a homestead exemption, which protects at least some of the equity in your primary residence. State homestead exemption amounts vary greatly.
Chapter 7 bankruptcy does not provide a way for filers to make up mortgage arrears. Unless you can work something out with the lender, you will eventually lose your home, despite your bankruptcy filing. For more detail, see Can I Keep My Home in Chapter 7 Bankruptcy?
In Chapter 13 bankruptcy, you keep your property and repay your debts (some in full, others in part) over time. Because you keep your property in Chapter 13, you won't automatically lose your home. But keeping a home in Chapter 13 can be costly.
If you are current on your mortgage payments, and you can cover all of your equity with bankruptcy exemptions, you'll be fine. However, here's where it can get expensive—a filer must pay the value of any nonexempt equity to creditors through the plan. So you'll need to show that you have sufficient income to pay your monthly house payment, your nonexempt equity, and all other required debt payments over the course of the three- to five-year Chapter 13 repayment plan.
If you are behind on mortgage payments or facing foreclosure, Chapter 13 allows you to make up the arrearage through your repayment plan. For this reason, Chapter 13 is often the right choice for people at risk of losing their homes. But again, you'll have to show that you have enough income to make your regular monthly payment and pay the arrearages and all other required amounts—including nonexempt equity reimbursement—over the course of the plan. Learn about calculating a repayment plan and the steps involved in Chapter 13.
Chapter 13 can also help if you have second or third mortgages or home equity lines of credit (HELOCs) that are not secured by the equity in your property. If this is your situation, you might be able to "strip off" (remove) those mortgages and loans from your home. Learn more about Removing a Second Mortgage in Bankruptcy.
Most people's home is their most significant asset, so it's important not to make a mistake. A bankruptcy attorney is in the best position to review your situation and explain the options available to you.