IF I FILE CHAPTER 7 BANKRUPTCY CAN I KEEP MY HOUSE?
This is one of the most frequently asked questions by those considering filing bankruptcy. The answer to this question, like many others, depends on your situation.
There are two ways that you can lose your house if you file bankruptcy. The first way is if you fail to make your mortgage payments. This is no different than if you had not filed bankruptcy. Failure to make your mortgage payments will result in the bank or mortgage company starting a foreclosure process against you. This is a judicial proceeding that eventually results in your house being sold to the highest bidder at a courthouse auction. Although you are permitted to stay in your house while the foreclosure is in process, once it is complete and the sale takes place, you are required to vacate.
Bankruptcy does not change the terms of your mortgage. Your payments and interest rate remain the same. Filing a Chapter 7 Bankruptcy will only provide you with temporary relief from a foreclosure. Once the Bankruptcy proceeding is complete (generally about 3 months), the creditor is free to proceed with the foreclosure. If a foreclosure had been started prior to your filing bankruptcy, the creditor may simply pick up where it left off after the bankruptcy is over. The creditor may also seek to proceed with foreclosure before the bankruptcy is over by filing a motion to terminate the “automatic stay.”
The second way you can lose your house is if you have too much equity. Equity is what you would get for your house if you sold it, after paying off the mortgage and any other debt against it. If you file Chapter 7, you are only allowed a certain amount of equity that you can have in your house and still keep it. The amount that you are allowed is called your “homestead exemption.” The amount varies by state. In Kentucky, it is $20,200.00 per person. In Indiana, it is $17,400.00 per person. If you own the house with your spouse, each of you is entitled to that amount of exemption.
If your equity exceeds those amounts, then the Bankruptcy Trustee will sell your house and pay the excess equity to your creditors, after taking a fee for himself. Many people filing Bankruptcy do not have a lot of equity in their house, so if they are current on their payments their house is safe. Keep in mind, a Chapter 7 Bankruptcy is a liquidation proceeding, so there is a limit to what you can keep. If your equity exceeds those amounts, you should consider Chapter 13.