How to keep the family home during bankruptcy
Individuals usually decide to declare bankruptcy after they have exhausted all other financial options. Bankruptcy allows people a fresh financial start, but with a cost. To satisfy as many outstanding debts as possible, banks may require an individual to liquidate assets.
When liquidating assets, banks consider any “excessive property” first, evaluating value based on a family’s need. Many families may wonder, during these evaluations, will they lose the house?
Determining if the house is excessive property
When filing for bankruptcy, three primary factors impact whether a family keeps the house:
- Type of bankruptcy: Individuals can choose to file Chapter 7 or Chapter 13 bankruptcy. The two types vary in the tax exemptions they offer families. If a family’s asset or property does not reach a specific dollar amount in value, that asset is exempt from liquidation. Chapter 7 bankruptcy offers lower value, but stricter, exemptions. Chapter 13 provides a better chance to keep the house, but most families will not qualify for Chapter 13.
- Equity in the home: When deciding which property is exempt, the bankruptcy trustee looks at only the equity of the house. Equity considers the house’s market value, subtracting the remaining balance of the mortgage or home equity loans. Most individuals filing for bankruptcy have low or negative equity in their homes and can keep their houses. Even if one’s home is over the exemption limit, the trustee may offer buyback options.
- An affordable mortgage: After bankruptcy, homeowners must still pay the mortgage or the bank will foreclose. Individuals who worry they may not be able to support the mortgage after declaring bankruptcy should reconsider liquidating their house, since bankruptcy offers a chance to walk away from debts and reassert financial control.
Take advantage of legal counsel
Families who wish to keep their house through bankruptcy have found success working with a local attorney familiar with bankruptcy law. A lawyer can help deal with courts, evaluate assets and negotiate with creditors to draft resolutions that help families get back on their feet.