Declaring bankruptcy is an option if you have bills that you cannot pay. However, bankruptcy is a scary process that can have lasting effects on your life. When you declare bankruptcy as a homeowner, there is the possibility that you might lose you home and all the equity you have worked so hard to build. As a homeowner facing bankruptcy, there are several types of bankruptcy available to you.
Types of Bankruptcy
Chapter 7 and Chapter 13 are the two types of bankruptcy most commonly filed by homeowners. Both types of bankruptcy are a federal judicial process that rids individuals of debts that they are unable to pay. As a homeowner filing, either Chapter 7 or Chapter 13 bankruptcy could result in losing you home. There are distinct pros and cons to both options; however, neither guarantees that you will keep your home and your equity.
Chapter 7 Pros and Cons
To file for Chapter 7 bankruptcy, you must pass a “means test.” The means test measures how much of your monthly income you can apply to paying off your debts. If the test determines that you do not have the means to pay off your debts, a trustee is appointed to your case. The trustee will assess all your assets and liquidate any secured assets to settle your unsecured debts.
PROS: If you feel that you will be able to make your mortgage payments once you are free from the burden of your unsecured debt, Chapter 7 bankruptcy might help you keep your home.
CONS: If you have equity in your home it can be considered part of your bankruptcy estate. If your home isn’t protected by an exception and can be sold for more than you owe, the trustee of your bankruptcy has the right to sell it and use the proceeds to settle your debt.
Chapter 13 Pros and Cons
If after cost of living is calculated the means test finds you could apply your monthly income to paying off your debts, your Chapter 7 filing is declined, and you must file for Chapter 13 bankruptcy. In Chapter 13 your debts are consolidated and reorganized into a court-approved payment plan. Upon the completion of your 3-5 year payment plan, the court will discharge you of your remaining unsecured debts.
PROS: If you feel that you can meet the terms of the payment plan, and pay your mortgage, Chapter 13 might be the right filing for you. As long as you meet the terms of the agreement your home is not at risk for liquidation.
CONS: If your financial situation continues to worsen and you begin to miss your bankruptcy payments you most likely won’t be paying your mortgage either. Then you will add the threat of foreclosure to your list of financial problems.
Your Home and Bankruptcy
Hopefully, this discussion provided you with a general understanding of bankruptcy and some of your options. If you considering bankruptcy we would strongly encourage you to contact an attorney to get their specific recommendations.
If you are considering selling your house to help with your financial situation we would love to talk to you to see if we can help. Please contact us at your convenience. There is no risk or cost to talk to us and we always keep your information confidential.