NATIONAL
DIVORCE & BANKRUPTCY CENTER
NATIONAL
DIVORCE & BANKRUPTCY CENTER
FILING BANKRUPTCY IMMEDIATELY STOPS: Debtors get much needed 'breathing room' and discharge or reorganize (chapter 13):
Homes or 'homesteads' are generally granted greater protection and exempt value than other property because of the value placed on home ownership in America.
In general, if the equity in the house (if any) is exempt and the debtor keeps making the payments, the debtor can keep the house after filing either a chapter 7 or 13 bankruptcy. (See below to determine the debtor's equity interest).
If the debor does have a nonexempt interest in the home, chapter 13 can be used to 'force' the creditor/lender to accept a repayment plan to 'catch up' the delinquent payments and cure the default over a period of 36-60 months.
Secured debt survives: While a bankruptcy discharge eliminates the debtor's personal liability for the mortgage, it does not disturb the lien. Meaning the lender still has its rights in the property - including the right to foreclose if you breach the loan agreement. Just filling the bankruptcy does not breach the mortgage; filing to make payments according to the loan agreement is a breach. So, make the payments - keep the house.
If the debtor is delinquent on the loan payments, chapter 13 can be used to 'force' the creditor/lender to accept a repayment plan to 'catch up' the delinquent payments and cure the default over a 3-5 year period). For example: David is $5,000.00 behind in his mortgage payments of $1,000.00 per month. In his chapter 13 repayment plan he proposes to repay the $5,000.00 delinquency over a 36 month period at $138.149 per month in addition to the ongoing current $1,000.00 monthly payment.
As with all property, you must 1st determine your home's value to determine its exemption status. To determine your interest in your home, (your equity), start with the 'forced liquidation' value of your home, not the amount you 'might' be able to sell it for in an optimum selling market. Next deduct the balance you still owe on your home plus the costs of transfering after a sale from the forced liquidation value. The difference is your equity interest in your home.
It is not unusual for a debtor's home to have a mortgage, a home equity loan, and a home improvement loan that are more than the property's value.
Compare your equity in your home to the exemption for real property in your state, or the federal exemptions list if your state gives you a choice of using state or federal exemptions, to determine if all of your equity interest in your home is protected from creditors. ( See Home Loans)
For example: The liquidation value of David's home is $80,000.00. He still owes $60,000 on the mortgage and another $15,000 on a 2nd mortgage for home improvements. David's equity interest in his home is $5,000. The Federal Exemption for homesteads is $15,000 and $30,000 for spouses. Like all other property the exemption applies only your equity interest. Using the Federal Exemptions, David's home is exempt from his creditors in bankruptcy. Texas and Florida exempt homesteads regardless of the debtor's interest in their home.
Check your state's exemptions list at our State By State Exemptions web site.
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Will filing bankruptcy stop foreclosure?
YES! The automatic stay that goes into effect when a debtor files bankruptcy stops foreclosure. Chapter 13 bankruptcy forces mortgage lenders to allow debtors to 'catch up' on delinquent mortgage payments over a typically a 3 - 5 year period, curing the default on the mortgage. ( See the section above Will I loose my home if I file for bankruptcy?)