Bankruptcy in Brief

a service of the Moran Law Group

Can I keep my house through bankruptcy?

An overriding concern for many contemplating bankruptcy is whether they will lose their house in the process. What happens to a house in Chapter 7 is a function of several issues, but, in general,

if the equity in the house is exempt, and

you can keep making the payments, then

you can keep the house.

Equity is exempt

If there is no non exempt equity in your home (value over and above the sum of the unavoidable secured debts on the property + exemption under applicable law + cost of selling the house) the trustee won't attempt to sell the house to pay your creditors.

If there is more than nominal non exempt equity, consider Chapter 13.

Secured debt survives

The bankruptcy discharge eliminates your personal liability for the mortgage, but it does not disturb the lien. Thus, after bankruptcy, the mortgage lender still has its rights in the property, including the right to foreclose if you breach the loan agreement.

But, just filing bankruptcy is not a breach of the agreement in many jurisdictions; failing to make the payments according to the loan agreement is a breach. So, make the payments, keep the house. This may change when changes to the bankruptcy laws become effective in Oct. 2005. The statutory provision that filing bankruptcy is not, in and of itself, a breach of the agreement is removed. (and I thought Congress wanted to promote home ownership?).

Almost without exception, the secured creditor wants you to keep the house and keep paying on the loan. The lender is not looking for an excuse to foreclose.

If you are behind on your payments and it makes sense to keep the house, consider Chapter 13.

Should you keep the house?

A different question is whether it is a good idea to keep the house if it is fully encumbered ( that is, the debt on the house is equal to or greater than the value of the house).

Sometimes, debtors have taken out home equity loans such that all of the value in the property is pledged to lenders. Or, the cost of paying the mortgages is greater than the cost of renting comparable housing.

Part of getting a fresh start may be walking away from property that is a greater burden than an asset.

Related topics

What liens can be avoided in bankruptcy

Exemptions

Is this debt secured

Avoiding foreclosure through bankruptcy

Bankruptcy basics

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2/25/07

Moran Law Group

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