Saving Your Home Through Bankruptcy

If your biggest priority is remaining in your current home, you will need to examine the two types of bankruptcy and choose the chapter that is best for your situation. While every case is different, both Chapter 7 and Chapter 13 provide ways for your residence to remain in your hands.

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Chapter 7 Depends on Exemptions
When you file a Chapter 7 bankruptcy, you and your attorney will choose whether to use state or federal exemptions. This chapter will require you to give up only your non-exempt property. Depending on the exemption you choose, it may be possible for you to keep much of your property and assets.

To see if exemptions would apply to your house, find the equity in your home by subtracting the amount you owe on your mortgage loan from what your home is worth. If your equity is less than the exemption amount, you probably have a chance of staying in your house. If your equity is more than the exemption amount, the house may be needed to pay back creditors under Chapter 7 bankruptcy.

In Massachusetts, a Declaration of Homestead (if properly filed at the Registry of Deeds) protects the first $500,000 of your home equity from being used toward other debts. Exceptions include taxes, mortgages, child support, and any debts acquired before filing the homestead. Federal exemptions protect $20,000 of the equity in your home.

Chapter 13 Lets You Pay Your Mortgage
This type of bankruptcy stops foreclosure and gives you time to pay your mortgage with a solid 3-5 year plan. You pay back the amount you owe, rather than using your assets to pay back creditors immediately. In this case, you will usually keep your home. Chapter 13 bankruptcy is often a good option if you are trying to protect secured debt such as a mortgage.

By eliminating unsecured debts and restructuring debts on personal property like cars or furniture, you should be able to use that freed cash to catch up on your mortgage payments over the duration of your bankruptcy plan. However, if you still do not have enough, you will have to face the possibility of surrendering your home, selling assets, or finding another source of income.

To recap, here are the advantages of bankruptcy:

• No direct contact with creditors
• Stops foreclosure proceedings
• Allows you to catch up on mortgage payments and eliminate debts immediately or over 3-5 years
• Reschedules secured debts (other than primary residence mortgage), and may make monthly payments lower

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We have one more issue of our Smart Guide dedicated to bankruptcy. If you have been reading these issues diligently, you have a better understanding of the bankruptcy chapters, process, and when it might be a good option. But you’re probably still wondering…what will my life be like after I file? Will I really be in a better position?

Read about life after bankruptcy in Issue 5 of The Smart Guide to Getting Out of Debt.

See you then!

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