How to best deal with a home after bankruptcy.
Many of our clients come to us when they have fallen on hard times. The loss of your job or business may mean that you are having a hard time paying your bills. A divorce or death in the family may also bring financial hardship along with heartache.
Whatever the cause, you are likely looking for options to help ease a difficult time in your life, and one of those options is filing for bankruptcy. So, what is bankruptcy and how does it affect your ability to stay in your home?
Types of bankruptcy
Filing for bankruptcy is a process by which you can eliminate or reduce your debt. The two most common types of bankruptcy are:
Chapter 7
Chapter 7 bankruptcy allows individuals or businesses to erase certain unsecured debts, such as credit card balances and medical bills. In this type of bankruptcy, assets are often liquidated and sold to help pay some creditors. Some debts, such as child support and most student loans, cannot be erased by bankruptcy.
To qualify for Chapter 7 bankruptcy, you must meet a fairly strict set of criteria.
Chapter 13
Because of the criteria involved in qualifying for a Chapter 7 bankruptcy, most individuals end up filing Chapter 13. In this type of bankruptcy, you submit a repayment plan based on your income level that shows how you will repay some of your debt within three to five years. The amount you will be required to repay varies and depends on your income and several other factors.
What happens to your home?
In cases of either Chapter 7 or Chapter 13 bankruptcy, you will not necessarily lose your home.
In a Chapter 7 bankruptcy, where assets are liquidated to pay off debt, the bankruptcy trustee may choose not to sell your home if the amount of the sale would not be enough to cover any debt payments. During bankruptcy proceedings, a certain amount of home equity is exempt (up to $60,000 for Coloradans younger than 60 years old), and that exempt equity usually means that a sale of the home will not result in enough funds to pay off creditors.
In Chapter 13 bankruptcy, assets are not liquidated. If you are up-to-date on your mortgage payments and agree to keep up with those payments, you will be able to keep your home. If you are behind on mortgage payments, Chapter 13 will allow you to make up those missed payments as part of your repayment plan. Chapter 13 bankruptcy can help you avoid foreclosure, but experts recommend trying to work out a repayment plan with the bank first, if avoiding foreclosure is your only reason for pursuing Chapter 13 bankruptcy.
Long-term impact
If you hope to qualify for future loans, including future mortgages, filing for bankruptcy or allowing your home to go into foreclosure could impact those plans. Chapter 7 and Chapter 13 bankruptcies result in two- to four-year wait times before you can apply for a loan. Foreclosure usually results in a much longer waiting period of seven years. (Source: credit.com)
Note: This article is intended for educational purposes only and should not be considered professional financial or legal advice. Consult an attorney or financial advisor to discuss the details of your unique situation.
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