What Happens to Your House if You File Bankruptcy
Financial difficulties can strike anyone at any time. Sometimes, despite our best efforts, circumstances beyond our control can lead to overwhelming debt. In such situations, filing for bankruptcy may be the only viable option to regain control of your finances. However, many people have concerns about what will happen to their assets, particularly their homes, if they file for bankruptcy. In this article, we will explore what happens to your house when you file for bankruptcy and answer some commonly asked questions.
What is Bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to eliminate or repay their debts under the protection and guidance of the court. It provides a fresh start to those burdened with overwhelming debt by either discharging their debts entirely or creating a manageable repayment plan.
Chapter 7 and Chapter 13 Bankruptcy
The two most common types of bankruptcy filings for individuals are Chapter 7 and Chapter 13.
Chapter 7: Also known as liquidation bankruptcy, Chapter 7 involves the sale of non-exempt assets to repay creditors. However, many states have homestead exemptions that protect a certain amount of equity in your primary residence. If the equity in your home is protected by the exemption, you can keep your house.
Chapter 13: Chapter 13 bankruptcy, also known as reorganization bankruptcy, involves creating a repayment plan to gradually pay off your debts over a three to five-year period. This type of bankruptcy allows you to keep your assets, including your house, as long as you make the required payments.
What Happens to Your House in Chapter 7 Bankruptcy?
If you file for Chapter 7 bankruptcy, the fate of your house will depend on various factors, including the amount of equity you have in it and whether or not the state’s homestead exemption applies.
1. Homestead Exemption: As mentioned earlier, many states have homestead exemptions that protect a certain amount of equity in your home. If your equity is within the exempted amount, you can keep your house. However, if your equity exceeds the exemption, the bankruptcy trustee may sell your house to repay your creditors.
2. Non-Exempt Equity: If your equity exceeds the homestead exemption, the bankruptcy trustee can sell your house, pay off any secured debts, and distribute the remaining proceeds to your unsecured creditors.
3. Mortgage Debt: If you have a mortgage on your house, bankruptcy does not automatically eliminate your responsibility to repay it. You may choose to reaffirm the debt, meaning you will continue paying the mortgage as agreed, or surrender the house to the lender.
What Happens to Your House in Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is often a better option for homeowners who want to keep their houses. The repayment plan allows you to catch up on missed mortgage payments and pay off the arrears over the three to five-year period. If you continue making the required payments on time, you can keep your house and avoid foreclosure.
Frequently Asked Questions
Q: Can I file for bankruptcy if my house is in foreclosure?
A: Yes, filing for bankruptcy can temporarily stop the foreclosure process. It will give you an opportunity to work out a repayment plan or explore other options to save your home.
Q: Can I sell my house while in bankruptcy?
A: Selling your house while in bankruptcy is possible, but it requires approval from the bankruptcy court. The proceeds from the sale may be used to repay your creditors.
Q: Can I buy a house after filing for bankruptcy?
A: Yes, it is possible to buy a house after filing for bankruptcy. However, it may be more challenging, and you may have to wait for a certain period, depending on the type of bankruptcy filed.
Q: Will bankruptcy affect my credit score?
A: Yes, bankruptcy will have a negative effect on your credit score. However, with time and responsible financial management, you can rebuild your credit.
Q: Can I lose my home due to medical bankruptcy?
A: Medical bankruptcy is not a separate type of bankruptcy. It is usually filed under Chapter 7 or Chapter 13, and the fate of your home will depend on the specific circumstances of your case.
Filing for bankruptcy is a complex process that can have significant implications for your assets, including your house. The outcome will depend on the type of bankruptcy filed, the equity in your home, and the state’s homestead exemption laws. It is crucial to consult with a qualified bankruptcy attorney to understand your options and make informed decisions regarding your financial future.