Understandably, one of the biggest fears that people have when they contemplate filing for personal bankruptcy, is whether they will lose their house. The short answer to this critical question is “not necessarily.” Now, for the longer and clearer version:
The reason that personal bankruptcy is referred to as a legal “protection” is to protect debtors — not creditors (despite the fact that many of them would like debtors to believe otherwise). Obviously, this does not mean that debtors can simply walk away from their financial obligations without a proverbial scratch. But it does mean that the court — and society in general, of which the court represents — understands that it is illogical and irrational to protect debtors by making them homeless.
In light of the above, the law will allow you to keep your home after filing for personal bankruptcy, provided that the following conditions are met:
• Your mortgage payments are current.
• You will be able to continue making mortgage payments after bankruptcy.
• You do not have a lot of equity in your home.
About the No/Low Equity Requirement
This last requirement should be clarified further, because it can seem counter-intuitive as to why it is beneficial to have no or low equity in your home. This is because if you have significant equity (as calculated by the value of your home vs. the amount of the outstanding mortgage balance), then the court-appointed trustee may order it to be sold, so that the proceeds can be distributed to your creditors.
With this being said, it is not the case that having significant equity automatically means that your home will be sold from underneath you. You can apply for a homestead bankruptcy exemption. The federal government has a program, as do individual states.
Do keep in mind, however, that the exemption cap for a primary residence that was purchased less than 40 months prior to a personal bankruptcy filing is $160,375 (this will increase in 2019). This cap is in place to prevent some people from deliberately moving to a different state in order to take advantage of a larger exemption amount.
Because this is such a serious and stressful issue, it bears repeating: the law does not want you to be homeless due to bankruptcy, and that is why provisions exist to help you maintain your primary residence, along with other exempt assets like your registered retirement savings.
To learn more, contact the Law Office of Charles H. Huber today. We will give you the facts you need to make a smart, safe decision that will either allow you to keep your home, or at the very least, minimize the financial damage to you and your family. Our experience is your advantage, and we are here to help.