How to Keep Your Home During Bankruptcy
When many Connecticut residents and families consider bankruptcy, their top priority is having a place to live. If you own a home and have run into financial difficulties due to an unexpected layoff, medical crisis, or uncontrolled debt, you may wonder how to keep your home during bankruptcy. The good news is that there are options available to help you resolve your debt without losing the roof over your family’s heads.
Can You Keep Your Home During Bankruptcy?
The family home is often the most valuable asset you have by the time you are considering bankruptcy. Collectibles, vehicles, and bank accounts are often sold off or spent first, to satisfy creditors and avoid going through bankruptcy. With few other assets at your disposal, you may wonder whether you can keep your home during bankruptcy.
Foreclosure vs Bankruptcy
Many Connecticut residents start considering bankruptcy because their home goes into foreclosure. Foreclosure is a debt collection tool used by banks and mortgage lenders to avoid losses on the money they lend to homeowners. Mortgages and home equity loans, which can also be satisfied through foreclosure, are “secured debts.” The security is the fact that the bank can force the sale of your home to repay the debt if you can’t make the payments.
Bankruptcy doesn’t discharge secured debts. You can’t get out of foreclosure proceedings by filing for bankruptcy. But in Chapter 7 you can put it on hold until you sort out your other, unsecured debts (like credit cards or medical bills). In Chapter 13 you can cure mortgage arrearages and resume current payments (“cure and maintain”) even on a mortgage that is in foreclosure. It is also possible to obtain the release of a second mortgage or Heloc if it is completely out of the equity picture in Chapter 13, and to obtain the release of any judgment liens on the property. Filing a petition for bankruptcy triggers an automatic stay on all collections efforts against you, including foreclosure. As long as your home has not already been sold at auction or in a sheriff’s sale, your bankruptcy attorney can use the bankruptcy stay to your advantage.
Do You Keep Your Home During a Chapter 7 Bankruptcy?
In a Chapter 7 bankruptcy, the bankruptcy trustee can force the sale of petitioners’ property to satisfy the debts they owe creditors. However, there are many state and federal exemptions that protect specific types of property. One of those is the homestead exemption. Both Connecticut law and federal law protect a certain value of equity in a petitioner’s primary residence:
- Federal law protects the first $23,675 in equity
- Connecticut law protects $75,000 for individuals or $150,000 for married couples filing jointly
The Connecticut statute can apply to mobile homes. However, $13,950 of the federal homestead exemption can be shifted to apply to other property for renters or others who don’t own real property. You can’t pick and choose between exemptions. You will either need to apply all state law or all federal law. Your bankruptcy attorney can help you examine the bigger picture to see which set of exemptions protects the most of your property.
Calculating the Equity in Your Home
Those numbers may sound small compared to the current housing market. However, they apply to the net value of the home. Equity is calculated by taking the current market value of the property and subtracting the current balance on your mortgage, second mortgage, and home equity line of credit. Whatever is left is the equitable value of your property. If that amount exceeds either the state or federal homestead exemption (whichever set of exemptions you choose to apply to your case as a whole), then your home could be sold and the excess equity used to satisfy your debts.
Should You Make Mortgage Payments During a Chapter 13 Payment Plan?
If you have more equity in your home than the Connecticut homestead exemption protects, and you have sufficient income to qualify, you may benefit from filing a Chapter 13 payment plan instead of a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you and your bankruptcy attorney lay out a payment plan distributing all your available income over the next three to five years. If you are able to make payments according to that plan all dischargeable debt that is unpaid at the end of the period is discharged.
As discussed above, mortgage debt is not dischargeable. However, the money you have to pay to your mortgage company can be considered in preparing your payment plan. Secured debt is given priority in the distribution of your monthly payment plan. That means making your mortgage payments during a Chapter 13 payment plan can actually help you discharge more of what you owe. You will still have the mortgage debt when the payment period ends, but with more of your money going toward mortgage payments, there is less available for unsecured creditors, and more of their debt will be discharged.
How to Save Your Home During Bankruptcy
If you are concerned about how to save your home during bankruptcy, discuss this with your bankruptcy attorneys before you file your petition. They can help you:
- Determine the equity in your home
- Decide whether to apply state or federal bankruptcy exemptions
- Negotiate with your mortgage lender to modify your mortgage payments so you can afford them
- Strategize when and how much to pay your mortgage company to avoid foreclosure
- Enforce a bankruptcy stay if your home has already gone into foreclosure proceedings
- Include your home loan in your Chapter 13 payment plan
- Create a budget for life after bankruptcy that keeps you on track with your payments
- Reaffirm your secured debts after the bankruptcy is discharged
Being strategic about when and how you file for bankruptcy, and make your mortgage payments, can help you get out from under other unsecured debts while keeping your family safe at home.
At Lawrence & Jurkiewicz, our bankruptcy attorneys focus our practice on helping people. We know how to take full advantage of the state and federal exemption statutes to help you keep your home during bankruptcy. We will meet with you to review your assets and income sources, identify the best strategy, and file for bankruptcy. Our bankruptcy attorneys want to help you get a fresh start. Please contact us for a free consultation or call us at (860) 264-1551.