When you file Chapter 7 bankruptcy, you can generally keep your home if: (1) it is your “homestead,” (2) you are current on payments, and (3) any equity in the home can be protected using your bankruptcy exemptions.
If you are behind on your mortgage payments and you need to file Chapter 7 bankruptcy, you may need to get caught up on your payments before filing. Keep this in mind when planning your filing timeline.
Your Home is Property of your Bankruptcy Estate
When you file bankruptcy, something called your “bankruptcy estate” is created. Almost all of your assets, including your home, are part of the bankruptcy estate.
Part of the price of admission (for bankruptcy relief) is giving up control over your assets to the bankruptcy court while your bankruptcy case is pending. This is generally 4-6 months in an average Chapter 7 bankruptcy.
What is “Court Control of my Assets”?
What does it mean to say the court has “control” over your assets / bankruptcy estate?
Mostly your bankruptcy trustee and the court are concerned with selling what are called “non-exempt” assets and using the sales proceeds to pay your creditors.
But, don’t be alarmed by this– most Chapter 7 filers have no non-exempt assets, so they don’t need to worry about the court selling any of their belongings.
What is an “Exempt” Asset?
To say an asset is “exempt” just means you are able to protect its value using your bankruptcy exemptions.
Example: you have $20,000.00 in equity in your home. You qualify treat is as your homestead.
A single, California bankruptcy filer who is single, not disabled, and lives alone will be allowed either $75,000 or $25,575 homestead exemption, depending on which exemption scheme you elect. (Your selection of exemption scheme will be determined by your other assets.)
So, you just note on your bankruptcy paperwork that you are using the applicable exemption to protect your home from sale by the bankruptcy trustee.
Do I Have to Exempt the Entire Value of my Home to Protect It?
No. You need to be able to exempt the amount of equity that is in your home. “Equity” is the difference between what your home is worth and what you owe on it.
Does my Bankruptcy Discharge Wipe Out my Mortgage?
Yes and no.
When you receive a Chapter 7 discharge, your personal liability on the mortgage is wiped out. This means the mortgage lender cannot sue you personally if you don’t pay your mortgage.
BUT, the mortgage lien on your house is generally unaffected by bankruptcy.** This means your lender still has a right to foreclose if you don’t make your mortgage payments.
If you want to keep your home, you must keep making mortgage payments after receiving your bankruptcy discharge.
What if I am Behind on my Mortgage Payments, but I Need to File Bankruptcy Immediately?
If you are behind on mortgage payments but you have an emergency situation (like a garnishment or bank levy) that forces you to file bankruptcy right away, it is likely your mortgage lender will ask the bankruptcy court for relief from the bankruptcy automatic stay.
This just means they are asking the court for permission to go forward with collections activity even though the automatic stay would normally prevent this.
Secured creditors are often granted this relief when the collateral by which their debt is secured has the potential to decrease in value during the time your bankruptcy case is pending.
Should I Consider Reaffirming My Mortgage?
The short answer is….NO!
Sometimes bankruptcy filers mistakenly think they are required to reaffirm a mortgage to keep their home. THIS IS NOT TRUE.
Furthermore, it almost never makes sense to reaffirm a mortgage in bankruptcy.
(Though, keep in mind every situation is different, so you should consult an attorney.)
. . . . . . . . . . . . . . . . . . . . . . .
**There are some exceptions for some unsecured junior mortgages, and some involuntary liens. Sometimes those can be removed during bankruptcy. But, you might need to file a Chapter 13 to get this relief. And, this topic is beyond the scope of this post.