Keeping Your Home When Going Bankrupt

June 24, 2009 by Julio
Filed under Bankruptcy

When going bankrupt, the one question on the minds of most people is whether or not they can keep their home. Keeping your home is possible when you are filing for bankruptcy, but only under certain circumstances and if you go about it the right way.

People can have trouble paying their debts for one of many different reasons, and it is happening much more frequently these days due to the current economic problems. These problems began in the USA when mortgage lenders tried to be greedy, and offered mortgages to those that could barely afford them - in fact many couldn’t afford them, but were given them anyway.

These are referred to as sub-prime mortgages, meaning that they are less than ideal basically, and they a greater risk than a regular mortgage. Obtusely, they demand higher mortgage rates and more stringent repayment conditions, when it would have made more sense to ask a lower monthly repayment from such people. However, that was the basic cause.

Lenders, however, will differ, and claim the problem was due to holders of such mortgages not paying, or not being able to keep to their agreement. Generally, that would not be a serious problem, but in times when negative equity is common due to dropping house prices, and people owed more on their mortgages than their homes were worth, it was a devastating situation to lenders, and many banks and building society lost too much money because of this to survive.

So, we are now in a situation with rapidly deflated property prices, and many people out of work or with reduced income that are unable to pay their mortgage. Bankruptcy seems the only way to many who have several other debts, but they still want to keep their homes. What’s the point of putting people out onto the streets with nothing to live for when they were able to meet their commitments before this recession came along?

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They didn’t cause the situation, and if you are one of them you likely rightfully feel aggrieved that you are in this situation. So what can be done?

1. Know your Rights

First you should make sure that you know your rights. Either read up bankruptcy law and also find out what other options are available to you, or discuss your problem with somebody that can help. Perhaps a loan modification is more appropriate than bankruptcy - if your debt is only your mortgage, then likely that will be the case, and you can discuss your problems with your mortgage lender. Bankruptcy is a last choice scenario for you. Not so, however, if you have several other debtors on your back.

2. Get to Know the Law

Find out how the law affects your personal circumstances and particularly check out Chapters 7 and 13 of the Bankruptcy Code. Some basic information is provided below. Incidentally, filing for bankruptcy places an immediate stay on any action being taken against you, including foreclosure, so if they are about to foreclose on you, filing will stop that until the legal process has taken place.

a) Chapter 7

Chapter 7 is basically liquidation. You still have to pay any income tax due for up to three years ago, but not before that, and any fiduciary or trustee taxes due, and also have to keep paying child support and alimony, but not credit card debts and foreclosures, and access to any amenities disconnected will be returned to you. If you have a lot of credit card debt and are behind in your mortgage with no equity on your home, this is best for you. What’s the point of keeping trying to pay for a house that is worth less than you owe on it? It might be better to lose it and start again. Bankruptcy under Chapter 7 allows you to do that and have most of your debts squashed.

You are even allowed to keep up to $2500 in your bank, and some equity on your car, but not any equity on your home. In fact, you should only file under Chapter 7 if you have no equity: you owe more or the same as the value of your house. If you have equity, the foreclosure will go through and your creditors paid from the proceeds.

b) Chapter 13

File under Chapter 13 if you have equity on your house, because otherwise you will lose it. The strange situation is that with no equity, Chapter 7 allows keeping your home as long as you can maintain the repayments, while it won’t if you have equity. Chapter 13 permits you to come to a repayment agreement with your debtors, and possibly through a loan modification that permits you to pay less interest or reduce the capital.

The upshot is that keeping your home is possible if you know your rights, and you file for bankruptcy under the most appropriate Chapter of the Bankruptcy Code. However, you should take advice as to whether bankruptcy is your best option, because there are others that could help, particularly in these financial times when creditors don’t really want to foreclose on you and would rather come to an arrangement.