If you're considering filing for bankruptcy -- either a Chapter 7 liquidation or a Chapter 13 reorganization and payment plan -- you may be wondering how filing for bankruptcy will affect your ability to remain in your home. Luckily, there are a number of protections under bankruptcy law that can allow you to keep your home, as well as qualify for future mortgages. However, these laws continue to evolve, and these protections may change in the future. Read on to learn about how your home will be treated during a Chapter 7 bankruptcy, as well as some expected future changes in these laws.
Can you keep your home after filing for bankruptcy?
There's no need to let fears of homelessness prevent you from filing for bankruptcy -- in general, as long as you're up-to-date on your mortgage payments, you'll be allowed to remain in your home. There are two primary ways to accomplish this under a Chapter 7 bankruptcy: either by using available exemptions to exclude your home from the filing, or by reaffirming your mortgage.
- The same exemptions that can help you reduce your property taxes can also help you keep your home in bankruptcy. There are various exemptions available under federal and state laws. If the equity in your home falls within one of these exemptions, you'll be able to exclude your home from the bankruptcy filing altogether, as long as you keep making mortgage payments on time.
- If your home equity falls outside the exclusion amount, you can reaffirm the mortgage. This is essentially a new promise to pay, made outside the bankruptcy filing. Because you're prohibited from filing for bankruptcy again for several years, and because the bank is able to enforce a sale of your home through foreclosure if you stop making your payments, the risk to the bank is low in allowing you to keep your home.
If you are behind on your mortgage payments, you may run the risk of foreclosure or bankruptcy liquidation. In foreclosure, the bank will obtain a legal judgment to your home which allows them to sell your home at auction and use any sale proceeds to pay your outstanding mortgage, plus any fees or penalties. In a bankruptcy liquidation, the bankruptcy trustee will seize and sell your home to divide the proceeds among various creditors.
What changes are being made in these laws?
Currently, if you owe more on your home than it is worth, you're generally allowed to discharge second mortgages, home equity loans, or home equity lines of credit in a Chapter 7 bankruptcy. However, this law may soon change. The U.S. Supreme Court is currently considering a lawsuit regarding the ability to discharge these second mortgages in bankruptcy under certain conditions -- and the banks are arguing against this discharge. If the Supreme Court decides in favor of the banks, future bankruptcy filers may be stuck with both a first and second mortgage on an underwater home, even after other debts are discharged.
Will you be able to apply for a new mortgage after filing bankruptcy?
Whether you've chosen to sell your home, or it has been sold in foreclosure or through bankruptcy, you can still qualify for a mortgage after bankruptcy -- as long as you wait a few years. For certain types of federally-guaranteed loans, such as FHA, VA, and USDA loans, you'll need to wait 2 to 3 years after your discharge before qualifying for a mortgage. If you're going the conventional route, you'll need to wait at least 4 years, and may be subject to additional documentation requirements and a higher down payment.