Can you File Chapter 13 and Keep your House?

You are looking into filing chapter 13 but are worried about losing your house.
Information in this article does constitute legal advice, is for informational purposes only and may not constitute the most up-to-date information. Readers should contact their attorney for advice to any particular legal matter.

Missing a number of your mortgage payments can force your lender to start foreclosure action. If you want to keep your home, Chapter 13 bankruptcy can help. There are property exemptions in bankruptcy that will protect your home equity. We will discuss how to keep your house by filing for Chapter 13 bankruptcy.

How Home Equity is Treated in Bankruptcy

After you pay all liens on your home, the remaining value is known as equity. Your equity is the fair market value of your home minus your outstanding mortgage and other liens on the home. It is the amount you can use to repay your unsecured lenders if you sell the home.

Home equity is considered part of the bankruptcy estate when filing for bankruptcy. Therefore, the trustee can use home equity to repay unsecured lenders (creditors without collateral)

The Bankruptcy laws acknowledge the importance of a debtor retaining some assets to help them recover after a financial hardship. Thus, the legislators came up with federal bankruptcy exemptions which protect the debtor's equity in some assets. 

A homestead exemption protects a debtor's home equity to a specific amount when they file for bankruptcy. Therefore, neither your creditors nor the court can use the protected equity to repay unsecured debts.

Most people who file bankruptcy use the homestead exemption to protect the equity in their homes. The catch is you should not have excess equity in your home than allowed in your state. While you can file bankruptcy if you have excess home equity, it will be treated differently.

How Can I Know the Homestead Exemption in My Home?

As of 2023, the federal homestead exemption is $27,900. It changes every three years. The homestead exemption only applies to your primary residence and does not apply to rental, investment, vacation, or secondary property. If you are married, you can double the exemption.

Depending on your state, the bankruptcy court can require you to use state bankruptcy exemptions or federal exemptions. State exemptions can be higher or lower compared to federal exemptions. Use this free bankruptcy exemptions calculator to get an estimate of your homestead exemption. Alternatively, access the list of state homestead exemptions to estimate how much equity in your home is protected by homestead exemption in your state.

Should I File for Bankruptcy if I Have Excess Equity?

No. We do not recommend filing bankruptcy if you have excess equity since it might affect your bankruptcy case.

How Excess Home Equity Affects Chapter 7 Bankruptcy

Chapter 7 helps debtors get rid of debt by liquidating their assets. The court assigns a trustee to your case who liquidates your assets and uses the money to pay your unsecured creditors. So, if you file for Chapter 7 when your home equity is above the homestead exemption, the trustee could sell your home and repay your unsecured lenders using the equity.

Before liquidating your home, the trustee will analyze it and weigh whether selling it will benefit the bankruptcy estate. The trustee will consider the fair market value of the home based on a quick sale, usually lower than the fair market price if a realtor sells your home. They will also factor in the closing costs for the home and their fee (the trustee will receive a predetermined amount from the bankruptcy estate). The trustee fee is calculated once all liens and closing costs are fully paid.

The Chapter 7 trustee will also calculate how much your unsecured lenders will receive based on the claim. For example, if the creditors receive a small alit, the trustee might choose not to liquidate the home as it will have inconsequential value.

So, even if you might have slightly higher home equity than the homestead exemptions in your state or the federal bankruptcy exemption, the trustee might choose not to sell the home. However, you can never be sure. Therefore, consult a Chapter 7 bankruptcy lawyer if your home has equity before filing. 

The attorney is conversant with the exemptions and understands how the court trustee works and what they consider. They can, therefore, advise on whether you risk losing your home. While you can also consult a bankruptcy lawyer after filing, you can do little to keep the trustee from selling your home.

How Excess Home Equity Affects Chapter 13 Bankruptcy

Since Chapter 7 differs from Chapter 13 bankruptcy, having excess home equity in Chapter 13 bankruptcy will affect your case differently than in Chapter 7 bankruptcy. Chapter 13 helps debtors get rid of debt by reorganizing their debts and coming up with a repayment plan that they will adhere to for between three and five years. The court will go through the plan and prove it. 

Unlike in Chapter 7 bankruptcy, the trustee assigned to your case in Chapter 13 will not liquidate your assets. The excess home equity will, however, affect your payment plan. In Chapter 13, your unsecured creditors should receive the same amount that they would if you filed Chapter 7 or more.

For example, if your home equity exceeds the exemption by $30,000 over five years, it totals around $500 monthly. Suppose your proposed Chapter 13 payment plan includes payments of $650 toward your unsecured creditors based on your household's disposable income among other factors. In that case, your unsecured creditors will get more than they would if you filed Chapter 7 bankruptcy. Therefore, you get to keep your home. 

However, if you are paying less than $500 a month towards unsecured lenders in your plan. The court will ask you to amend your plan and increase your payment to cover the excess home quietly. If you are asked to increase your monthly payments, it will be worth it since you will get to protect your home equity and retain your home. Use our free Chapter 13 calculator and see an estimate of how much your Chapter 13 payment plan might cost if you filed for bankruptcy today.

Get Help Understanding Your Home Equity Before Filing Chapter 13 Bankruptcy

When facing financial hardship, the last thing you want to do is remain homeless with no starting point. Losing your home can be frightening, so we would like to help you understand your home equity before filing for bankruptcy. Our team of experts offers a free consultation, where we can assess your home equity based on your mortgage loan and state. We will also explain other available debt relief options and compare them to ensure you get the best option for your situation.

While Chapter 13 bankruptcy can help you keep your home, so can debt payoff planning and debt management. Depending on your income, debt settlement is also a viable option. We can also recommend a bankruptcy lawyer in your state for free one on one consultation. Don't hesitate to contact us. Do not risk losing your home while we can help you understand the risks and options for free!

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