Filing Chapter 7 is a means of discharging burdensome debt and giving you a fresh start. In most cases, debtors are able to keep most if not all of their property while no longer being obligated to pay unsecured debts like credit cards, medical expenses or other unsecured debt.
The property you may retain in a Chapter 7 bankruptcy must be within the allowable state or federal exemptions provided your state allows you to choose either one. Some states limit you to its exemptions while others permit debtors to make a choice to use either. Regarding your home, the states vary greatly in the amount of equity you can exempt. For example, Minnesota and Florida have an unlimited homestead exemption while Alabama only allows you to exempt $5000 in home equity for individuals and $10,000 for couples who file.
The federal homestead exemption is $22,975 for a single filer or $45,950 for married debtors. You need to compare the exemptions, if a choice is available, and use either the federal or state limits. The state where you file, however, may not permit you to exempt any home equity if your homestead exceeds a certain acreage.
Federal law, however, does not allow you to exempt more than $155,675, even in states like Minnesota and Florida with an unlimited homestead exemption, if you have not lived in that state for at least 40 months before filing. You can use the 40-month rule, however, in situations where you had a prior home in the state but sold it to buy your new home so long as you lived in both homes for at least 40 months.
Before you file for any bankruptcy, however, you may have to file a homestead declaration with the county recorder’s office or office of the probate judge in your county to record your right to the homestead exemption. Check with your attorney regarding this possible precondition.
What Happens if You are Facing Foreclosure?
You do have options once you file under Chapter 7 if your house is in foreclosure or is threatened by it. If you have no equity in your home, you can choose to surrender it to the trustee but you will also not be liable for any remaining loan amount, or deficiency, after the foreclosure sale as it would be discharged in your bankruptcy. Otherwise, you would be obligated for the deficiency amount if you did not file bankruptcy.
If you do have equity that is less than or is equal to the state or federal homestead exemption, depending on which one you chose, if allowable, then you may keep your home and continue making your monthly mortgage payments.
When you file for bankruptcy, an automatic stay goes into effect so that any foreclosure or any other collection activities must cease. In a Chapter 7, however, the lender will file a motion to relieve it from the automatic stay provision so that it can proceed with the foreclosure. This does, however, give you and your attorney some time to find a resolution to your situation. Otherwise, the lender or mortgage holder will get relief from the automatic stay as it applies to it.
Your other option, if you do have equity that is more than the limit, is to file a Chapter 13 bankruptcy. This is a debt reorganization whereby you can have your mortgage arrearages paid off in either 3 or 5 years so long as you can continue making your regular mortgage payments and can meet your obligations under the approved repayment plan.
If you are considering bankruptcy for relief from crushing debt and have a home with equity, talk to a bankruptcy attorney about your options in keeping your home.