Will I Lose My House if I File Bankruptcy?
What is Bankruptcy?
Bankruptcy is a means for people debtors who have a tremendous amount of debt to get out of debt either completely or to be relieved from some portion of it. A bankruptcy stays on the debtor's credit file for ten years.
Title 11 of the United States Code administers bankruptcy dealings. Bankruptcy is federal law business. Bankruptcy law is the essentially the same in every state with exceptions for exemptions. If the federal bankruptcy law is different from state law, the federal law prevails.
Types of Bankruptcy
There are a range of bankruptcy forms. The Chapter 7 bankruptcy is generally for individuals and married couples. Chapter 11 is typically for business owners. Chapter 12 is for family farmers with debt problems, and Chapter 13 is for individuals and married couples who desire to reorganize their debts. Therefore, depending on the debtor's need or the type of business owned, specific bankruptcy filings would apply.
Will I Lose My House if I File Bankruptcy?
Many debtors fear that they will lose their home if they file bankruptcy. However, if the home has no equity, which is calculated by taking today's value of the home and subtracting the costs of the sale, payoff balances and any liens, the trustee in a Chapter 7 bankruptcy will "abandon" the house to you. Abandoning the house to you means that you will be able to remain in your home and keep your house on condition that you can maintain payments on your mortgage. However, filing for a bankruptcy does not alleviate the property of any voluntary liens, like tax liens, deeds of trust or mortgages. The lender continues to preserve the right to foreclose on the property if the payments are not made as agreed. As long as the mortgage payments are made on time and as agreed, all is well because generally no lender wants to obtain any debtor's property. Lenders are in the business of giving loans, not obtaining property. They don't make their money that way. Lenders make money when the mortgage loan is paid on time and remain up to date. Foreclosure is a last option when a debtor fails to make payments.
What Does it Mean for Property to be Exempt?
Exemptions include statutory lists of the types and values of property that is lawfully outside the reach of the bankruptcy trustee or creditors. In every bankruptcy, the debtor is allowed to select property from the statutory lists of exemptions that are provided under his state law, and the debtor keeps the selected property. Therefore, the exempt property chosen is detached from the bankruptcy estate and is not accessible for use to pay any claims of creditors. The bankruptcy code allows debtors to get a fresh start after filing bankruptcy and at the same time keep exempt property selected to help her in her fresh start. The properties that are allowed as exemptions are decided by state and federal statutes, and they differ within states.
First Things First
One of the first things to do before deciding to file bankruptcy, when you're concerned about losing your home through filing via Chapter 7, is to determine whether there is sufficient equity in the home. The debtor does this by deciding whether the exemption available to him is equal to or exceeds the amount of equity in the property. If the exemptions available are found to be equal to or exceed the equity in the property, then the present equity in the property is exempt and the debtor gets to keep his home. This is providing he or she can afford to continue to pay the mortgage payment.
On the other hand, if the exemption is not adequate to protect the equity, or in other words, the present equity exceeds the exemption amount allowed, then the debtor should probably consider a Chapter 13 bankruptcy. In Chapter 13, the debtor is choosing a reorganization debt repayment plan and the house is included in the debt reorganization. This method also allows the debtor to keep her home even though she will not be able to completely liquidate all other debts. Now, once again, it is imperative for the debtor to make sure she can afford to pay the mortgage payments as well as the new agreement amount in the repayment plan. Otherwise, it's all a waste of time and effort. During these times, it is very important to be honest with one's self so as to avoid ending up in the same overwhelming state again.
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