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What Happens to Your House If You File Bankruptcy?

Protecting House and Home in Bankruptcy [1]Written by Craig D. Robins, Esq.
 
A person’s house is usually their most valuable asset.  Understandably, one of the first questions my homeowner-clients ask me is “How will filing bankruptcy affect my home?”
 
Foreclosures and Collections Are Stopped Cold
 
The first thing you should know is that as soon as your petition is filed, the automatic bankruptcy stay kicks in.  
 
This means that if you were behind with your mortgage, it now becomes against federal law for the mortgagee to continue any foreclosure proceeding.
 
If the House is Exempt, There Is No Problem Keeping It
 
Every state has a homestead exemption statute that sets forth how much equity you can keep in your home, while eliminating debts in a Chapter 7 bankruptcy case.  In some states, the homestead exemption is based on federal law.
 
In New York, the homestead exemption is $50,000 per person.  This is based on New York State law.  See:  Bankruptcy Exemptions in New York [2].
 
A husband and wife who file jointly can pool that homestead exemption and protect a total of $100,000 worth of equity.  Sometimes Bankruptcy Exemptions Can Be Doubled [3].
 
If the House Has a Great Deal of Equity, You Can Still Keep It
 
Even if there is more than $50,000 of equity per person, then you can still keep you house if you file a Chapter 13 payment plan bankruptcy. 
 
In such cases, the total amount you will have to pay back to your creditors through the plan, which is usually over a period of 60 months, must be at least equal to the amount of unprotected equity.
 
Sometimes deciding whether to keep a home or not can be a difficult decision.
 
If You Can’t Afford Your Mortgage or You Do Not Want to Continue Paying Your Mortgage You Can Walk Away (Eventually)
 
If you can no longer afford to keep your home and you have little or no equity in the home, then you may want to file for Chapter 7 bankruptcy in which case you can walk away from your obligation without any financial recourse from the lender.  See:  Strategic Mortgage Defaults Increasing [4].
 
In such cases, the lender still has the right to eventually foreclose on the home and take it back, but that can take an extended period of time during which you can continue to reside in the house without making any payments.  Bankruptcy Can Provide Way Out of Bad, Highly-Leveraged Real Estate [5].
 
When the lender eventually does take the property back, it cannot pursue you for any deficiency amount.  This is because the bankruptcy had the effect of discharging that debt.  One-Fourth of All U.S. Homeowners Are Underwater. What Should These Homeowners Do? [6]
 
Filing for Chapter 7 When There Is Substantial Unprotected Equity in the House
 
It is extremely rare that we recommend to a bankruptcy client that they file for Chapter 7 bankruptcy if they have a great deal of unprotected equity in their home.  Usually we recommend that they try to sell their home first.
 
However, we do see situations in bankruptcy court where a homeowner with substantial equity files for bankruptcy.  In such cases, the Chapter 7 trustee will seek to sell the home.  However, the trustee must pay the debtor the amount of the homestead exemption from the proceeds, which would be $50,000 per person.
 
If You Have Real Estate and Need Bankruptcy Relief, You Should Consult With Experienced Bankruptcy Counsel
 
Protecting real estate in bankruptcy can be tricky and must be done the right way.  When it comes to houses and homes, there are often many options when dealing with problematic debt situations.
 
It therefore makes sense to consult with a qualified and experienced Long Island bankruptcy attorney.
 
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