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Here's how it works. After filing for Chapter 7 , your property will go into a bankruptcy estate held by the Chapter 7 bankruptcy trustee appointed to your case. However, you don't lose everything because you can remove exempt property reasonably necessary to maintain a home and employment. The trustee will sell any remaining assets and distribute the sales proceeds to your creditors.
Here's the tricky part—if you make a mistake, it's unlikely that the bankruptcy judge will allow you to dismiss the case, and you could lose the house. So you must follow the rules carefully.
You'll likely lose your home if you're behind on the mortgage payment when you file for Chapter 7. Although the automatic stay will temporarily stop a foreclosure, the best thing you can hope for is delaying the process for a few months. It's also important to be sure you can afford to continue paying the mortgage payment after a Chapter 7 bankruptcy.
Losing the house after your case might put you in a worse financial position. If the lender couldn't sell the home for the amount you owe, you'd be stuck with a deficiency balance depending on the laws of the state you live in. Worse yet? You'd have to wait eight years to file a second Chapter 7 bankruptcy , leaving the lender plenty of time to collect a deficiency balance using collection methods such as garnishing your wages or levying on a bank account.
If your mortgage payment is up-to-date, your next step will be determining how much equity exists. You'll start by valuing your home. Then you'll subtract any outstanding mortgage balance from the home value. The equity would be the amount you'd have in your pocket if you were to sell the house.
If you don't have any equity, you're in good shape—trustees don't sell houses without equity. Otherwise, you'll need to be able to protect your equity with a bankruptcy exemption to avoid losing the home in Chapter 7 bankruptcy. Learn more about filing for bankruptcy if you have equity in your home. State exemption statutes list the property its residents can protect in bankruptcy. Some states allow residents to choose between either the state exemption list or the federal bankruptcy exemption scheme.
Either way, almost all states allow residents to protect some home equity with a homestead exemption. Can you file bankruptcy and keep your house? Each handles home equity differently. Generally, Chapter 7 involves selling assets to pay debts, while Chapter 13 relies on a payment plan to help people get their debt under control. You may retain your equity in the property up to an exemption in state law. The proceeds pay your creditors based on priorities spelled out in the code.
The trustee sells remaining assets, if there are any nonxempt from the bankruptcy. How does Chapter 13 bankruptcy work? If the court accepts it, you will make these payments over the next three to five years. Many homeowners try to keep their house through Chapter 13, but often the payments are too much for them to handle.
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