May I Keep My Home in Bankruptcy?
May you keep your home in bankruptcy? The simple answer is yes, if you can afford it.
Once again, it’s the grand bargain of bankruptcy. You devote available resources to paying your creditors and you will receive a discharge of your unpaid debts. Your home mortgage debt may be included in a bankruptcy discharge. You might be able to keep your home, so long as you can pay the mortgage. But let’s break this down into some important parts.
First, your home is an asset, probably your most valuable property. You will list it as an asset in the bankruptcy, along with an estimated value and description of your mortgage debt. A common misunderstanding about your home in bankruptcy is that if you want to keep it, you shouldn’t “include it” in the bankruptcy. All assets, that is all your property and “stuff,” are included in the schedule of assets.
Second, your mortgage loan is a debt, and all of your debt must be included in the schedules of debts. Your mortgage loan is a secured debt. The bankruptcy discharge may discharge the debt (your personal responsibility), but it will not affect the mortgage lien. For example, in chapter 7 bankruptcy, the discharge order will discharge the mortgage debt, along with most other debt. However, the bankruptcy discharge will have no effect on the mortgage lien.
In chapter 13 bankruptcy, if you want to keep your home you will make provisions in the chapter 13 plan to catch up on missed payments and continue future payments, and the discharge order will not affect either the debt or the mortgage lien. If you do not want to keep your home in chapter 13, the discharge order will eliminate the unpaid balance of the debt, and the lender will use its lien rights to start a foreclosure and sell the property.
Also, in chapter 7 bankruptcy, if your home has enough equity, the bankruptcy trustee might be interested in recovering that equity for the benefit of your unsecured creditors. In Colorado, the homestead exemption protects $60,000 of the equity in your home ($90,000 if you are 60+ years of age or disabled). The chapter 7 bankruptcy trustee will investigate to see if there’s enough value in your home to pay off all mortgages, pay you the homestead exemption, and leave any proceeds of sale for your creditors. If so, if you want to keep your home you will have to find a way to pay the trustee the amount he or she would have received if the home were sold.
In this economy, it is uncommon to find any equity in a home. However, in today’s economy, many people choose bankruptcy either to surrender the home and discharge the debt or to save their homes from foreclosure by filing chapter 13 bankruptcy. Bottom line: You may keep your home if you can afford it. If you can't, you are generally better off allowing it to go to foreclosure sale (What about short sale? See this linked article.)
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The statements of law made here are general statements of law, effective at the time published and subject to change from time to time. These statements are not intended, nor may they be construed, to be applicable to any particular set of factual circumstances nor to any particular person. I recommend that all readers seek the assistance and advice of an experienced bankruptcy lawyer for guidance in their particular circumstances.
© Copyright 2013 David C. Hoskins, licensed Colorado lawyer