Can I Keep My Home if I File Bankruptcy?

One of the first questions, many homeowners who are contemplating filing bankruptcy ask is "Will I lose my home if I file for bankruptcy?"

The answer to this question depends upon a number of factors. The first of which is, what chapter bankruptcy is contemplated i.e., Chapter 7 or Chapter 13.

Under a Chapter 13, which is a court sanctioned repayment plan, a homeowner who is behind on his mortgage payment is given the opportunity to make monthly plan payments to save his home. Plan payments consist of the contractually agreed upon regular monthly installment payments, plus, if a homeowner is behind on his mortgage, an amount necessary to cure his arrears over the time frame established by the court approved Chapter 13 plan.

Chapter 13 plans can be as long as five years. Thus, a homeowner will be able stretch his arrearage payment out over this term, so long as he does not miss the monthly court approved upon plan payment. Assuming the homeowner can make the plan payments, over the life of the Chapter 13 plan, the secured lender will not be able to foreclose and the homeowner will be able to keep his home.

A Chapter 7 bankruptcy, unlike a Chapter 13, is known as liquidation. This type of bankruptcy has the effect of wiping out all dischargeable debt. Typically all unsecured debt is dischargeable. However, there are exceptions for taxes, domestic support obligations and other debts that the bankruptcy court deems are non - dischargeable. A determination that a debt is not dischargeable, requires a court hearing in what is known as an adversary proceeding. Certain intentional wrongs, like fraud and willful injury claims fall within this category and may be subject to an adversary proceeding.

In a Chapter 7, however, a secured creditor whose debt is dischargeable, in that the debtor will no longer have any personal liability for the debt, will continue to maintain any interest that the creditor had in the property that it holds as security for the debt. Therefore a creditor that has as security a car or home will be able to repo the car or foreclose on the home and recover its collateral, should the Chapter 7 debtor fall behind and not be able to catch up on the debtor's regular and contractually agreed upon monthly installment.

One further thing that should be mentioned, when the debtor has equity in an asset, over and above any exemption that might be applicable, the trustee in a Chapter 7 can force a sale of that asset to satisfy the demands of the unsecured creditors.

The extent of the exemption in real estate, which is known as the homestead exemption because it applies only to owner occupied residences, varies from state - to - state. Additionally, the homestead exemption varies depending upon the age and status of the person claiming the exemption.

In California, for example, the homestead exemption ranges from a low of $75,000.00 for a single person to $175,000.00 for persons over the age of 65 or those who are disabled or fall in other special categories. (California Code of Civil Procedure 704.730 )