Help! If I File Bankruptcy, What Happens To My House?

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Published on September 23, 2020

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Help If I File Bankruptcy What Happens To My House

There may come a time that you struggle with money, and when you’re in over your head in debt, you need to consider your best options. One way to deal with unmanageable debt is to file bankruptcy. But wait! What about your house? If you’re wondering, Can I keep my house if I file bankruptcy? The answer to that depends on the type of bankruptcy that you file: Chapter 7 or Chapter 13. Let us help you with this guide.

Chapter 7 Vs. Chapter 13: The Difference

Most people tend to file bankruptcy under Chapter 7 because it’s easier and the preferred option for people with few assets and no income. For some that still have income, Chapter 13 is a better option to catch up with their payments and keep their valuable assets.

 In Chapter 7, it’s when you claim that you don’t have any disposable income to pay off your debt. So, if you want to eliminate your debt, your assets will be seized and sold off so that you can pay a portion of your debt. 

 In Chapter 13, you have the option to keep all your assets, regardless of their value. It’s when you enter into a debt repayment plan, so as long as you can keep up with the payment to your creditors, your properties are safe.

It’s normal to fear losing your home after you file bankruptcy. Your house, though, can be exempt depending on how much it’s worth if you file Chapter 7 bankruptcy. However, you need to be current in your mortgage payments to keep your house.

The exemptions vary from state to state. In some cases, you can keep your house and some of your assets because their equity is lower than the bankruptcy exemption amount, which we’ll explain more in the following sections. 

When Is Your Property Exempt?

Will I lose my house if I file for bankruptcy, you ask? A bankruptcy trustee will not sell your property if its equity is less than or equal to the homestead exemption. The federal homestead bankruptcy exemption protects your house equity value of up to $25,150. The exemptions could be higher in some states. Let’s take a look at the three most populous states in the country:

California has two systems to use in the homestead exemption. In System 1, the exemptions are as follow:

  • $75,000 for single homeowners
  • $100,000 if you live with family members
  • $175,000 if you’re senior (65+ years old) or with disability
  • $175,000 if you’re aged 55 above, single and with low income

 In System 2, the exemption is up to $29,275. As to which system will be more applicable to you depends on what you want to protect.

 Texas is more generous, with unlimited homestead exemption for the following conditions:

  • 10 acres of residence in a city, town, or village
  • Up to 100 acres in the country
  • Up to 200 acres for families

 You can choose to liquidate your house, and the proceeds will be exempt for the next six months.

 Another generous homestead exemption is in Florida. If your home is not more than half an acre in a municipality or within 160 acres in other areas, and you own it for at least 1,215 days, you have an unlimited exemption. Otherwise, you’re limited to the federal homestead exemption. If you file under Chapter 13, you’ll pay the nonexempt equity amount in your repayment plan.

What’s the Process of Filing Bankruptcy?

Filing a Chapter 7 bankruptcy is more straightforward than Chapter 13, and it can take four to six months to complete the whole process. You’ll go through mandatory credit counseling and budget counseling, attend a creditors’ meeting, and wait for the court’s written discharge of your debts.

Let’s dive into a few questions that you probably have about your house:

Q1

How Does the Trustee Decide to Sell My House?

The trustee may or may not sell your home depending on its equity value. If it’s less than the exemption amount, then the trustee must not sell your house. If you have significant equity left, the trustee will sell it. 

The goal of selling your property is to get funds that can be used to pay off your unsecured debts. If your home gets sold, the trustee must give you first the exemption amount before paying your debts to the creditors.

Q2

Will the Trustee Immediately Sell My House?

If you have significant nonexempt home equity you can’t protect, the trustee will sell your property, following the usual real estate selling process. The trustee doesn’t need to rush the sale because a quick sale would usually result in lesser value for your home, which is not going to benefit you.

Q3

Will I Get A Fair Value for My House?

The trustee will hire a real estate broker upon the court’s approval, list the property for sale, and find a buyer. It will be sold based on fair market value. You can hire a licensed real estate appraiser to do a full house appraisal, which can be expensive. Alternatively, your appraiser can do a comparative market analysis to determine the value of your home.

The trustee will also appraise your house, and if there’s a disconnect, the court will weigh in both assessments and decide on the final value. The court will also need to authorize the sale of your house to the chosen buyer. Then, the creditors will be notified of the sale and given a chance to object.

Q4

Do I Get the Remaining Proceeds, If Any, After Creditors Have Been Paid?

Yes, you’ll get any remaining proceeds from paying the creditors. The bankruptcy trustee must give you first the exemption amount. Then, they will pay your secured debts and unsecured debts (credit cards, medical bills, etc.).

Q5

If My House is Seized, When Do I Move Out?

When the trustee decides to sell your home, you will have a few weeks to find alternative arrangements and move out. You don’t have to worry about immediate eviction. Sometimes, the trustee can allow you to stay until your house is sold.

Even when the trustee decided not to sell your house, and you’re facing foreclosure, you’d lose your home eventually.

When you file bankruptcy, the automatic stay will be in place. That means your lender should stop collecting from you and the foreclosure process ceases temporarily.

If you decide to surrender your house, you may still have 30 to 60 days before you must move out. That’s because the lender needs to file a motion to lift the automatic stay and follow the proper foreclosure process that will take that much time.

Sometimes, lenders don’t resume the foreclosure process until after the court has released your written debt discharge. That happens four to six months after you file bankruptcy.

Q6

Can I Keep My House if I Have Other Assets to Pay Off the Nonexempt Amount?

Debtors who file Chapter 7 don’t have the disposable income to settle their debts. If you have other assets that you can liquidate to pay a portion of your debts, and you want to keep your house, then you should file Chapter 13 bankruptcy.

Where Will I Live If I Lose My Home Through Bankruptcy?

Stop worrying and asking, “Will I lose my house if I file bankruptcy?” Even if you do, all hope is not lost! You can still have a new home even after bankruptcy.

 Some programs are available to help you on your road to recovery. State governments and nonprofits have home-buying assistance programs that you can tap into. These include the following:

  • Federal Housing Administration (FHA) loans
  • Veteran Affairs (VA) loans
  • United States Department of Agriculture (USDA) loans
  • State housing finance agencies
  • State homebuyer’s down payment agencies

Is Bankruptcy the Best Way to Go?

Bankruptcy is often the best option for people stuck in too much debt. It allows you to be discharged from your debts without too many consequences. Even if you lose your home, bankruptcy provides you debt relief, helping you get back on your feet and take control of your financial life again.

 However, bankruptcy can hurt your credit score badly, and it will stay in your record for around 10 years. Also, not all debts can be wiped out, such as student loans, court-ordered child support and alimony, federal tax liens, government fines, and court fines and penalties.

 Because you have negative information in your credit report, it will be difficult to get approved on future loans and credit card applications. Lenders that might accept your application could ask you for large down payments and higher interest rates.

Last Notes

Accumulating a mountain of debt is never a good experience, but sometimes, life gets in the way and out of your control. You have several options to deal with it, but sometimes, the best way to go is to file bankruptcy.

 Before you file bankruptcy, assess your needs and options carefully and study Chapter 7 and Chapter 13 to help you decide which is best for you. If you don’t have enough income, and you’re not confident that you can keep up with the payments in the coming months, it’s best to proceed with Chapter 7. You should also seek the help of a bankruptcy lawyer so that you’ll have a clearer direction and guidance.

 If you’ve been through bankruptcy or considering filing one, share your experience and tips in the comments below!

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