When debtors consider filing for bankruptcy, it’s not uncommon for them to ask the following questions: “Will I lose my wedding rings? Will I lose my home?” Filing for bankruptcy does not mean everything you own has to be liquidated to pay off your creditors – this is a misconception.
Do you have equity in your home? Meaning, is it worth more than what you owe on the mortgage? If you file a Chapter 7 bankruptcy, the trustee is not going to force you to sell your home if the homestead exemption covers the equity that you have in the home.
If you file a Chapter 13, you can still keep your home, however, you will have to reimburse the lender the amount that equals the nonexempt equity in the home – the portion of the equity that is not shielded by the homestead exemption. You will do this over the life of the repayment plan, which will be 3 to 5 years depending on your circumstances.
Taking Advantage of the Homestead Exemption
You may not be aware of it, but the bankruptcy court views the equity in a debtor’s home as an asset. In a bankruptcy case, the bankruptcy exemptions protect certain property that the debtor will need to maintain their household and remain employed, and the homestead exemption is one of such exemptions.
The bankruptcy exemptions are not uniform, they vary from state to state, so the amount anyone debtor has to protect their home depends on what state they live in. Further, the bankruptcy chapter a debtor files also determine what happens to a home and if the debtor can protect all of the equity in their home.
If you file a Chapter 7 for example, and your house has some equity that is not covered by the homestead exemption, the trustee could: 1) sell your home, 2) pay off your mortgage, 3) reimburse you for the amount of the homestead exemption, or 4) use any leftover proceeds to pay fees or pay off unsecured creditors, such as medical bills, credit card debt, or any personal loans that you have.
