Chapter 7 bankruptcy is often referred to with the term “liquidation” because it involves the liquidation of your property to pay off creditors. However, much of your property will be exempt from the liquidation process. In some cases, your house will be included in the property that’s exempt.
While you probably will not be able to keep a multimillion-dollar mansion through the Chapter 7 process, if you own a modest home — under the right circumstances — you just might be able to keep it.
More information about your home and exempt property
The ability to keep your home during your bankruptcy proceedings will depend on a variety of factors: (1) the type of bankruptcy, (2) how much equity you have in it and (3) whether or not you can afford to continue paying your mortgage.
Let’s look at each of these three factors in detail:
The type of bankruptcy: Here we’ll focus on Chapter 7 in terms of keeping your home. In general, the exemptions that pertain to Chapter 7 are stricter and less flexible than other types of bankruptcy. The federal government and bankruptcy laws assume that people in debt should sell excess property to pay down that debt. However, the Chapter 7 process is intended to give a fresh start on sound financial footing. It’s not intended to leave you in shambles. As such, for certain property — like homes that are valued under a certain amount — the Chapter 7 process will not force you to liquidate it. That said, if you’re intent on keeping a high-value home that you have invested a lot of equity into, Chapter 7 proceedings are probably not for you.
The amount of equity in your home: In terms of determining whether your home should be liquidated, the bankruptcy trustee will not consider the full value of your home — only the amount of equity you have in it. Your equity will be the amount of money your home is worth, minus the mortgage balance remaining. In many cases, you can use a homestead exemption to keep your home, but specific limits will apply. These limits could be different depending on your situation, so it will require an in-depth review to ascertain whether the homestead exemption will allow you to prevent the liquidation of your property.
Whether or not you can pay your mortgage payments: This has nothing to do with the law and more to do with common sense. If you can’t afford your mortgage payments after resolving outstanding debts in bankruptcy, you may want to consider liquidating your property and purchasing one that you can afford, or you could end up in debt problems again.
When considering Chapter 7 bankruptcy
Before you file for Chapter 7 bankruptcy, you will want to pre-review all of the Chapter 7 exemptions you can benefit from, as well as what you may need to liquidate and what debts you may be able to resolve through the process. This will help you understand whether or not the Chapter 7 process is right for you and your family.