Personal Bankruptcy and Homeownership

If you own a home, and are considering filing for bankruptcy, you are probably wondering how bankruptcy will affect your homeownership. How your mortgage is handled in bankruptcy really depends on several factors, including whether your file for Chapter 7 or Chapter 13, as well as what state you live in.

In general, to avoid foreclosure, you must ask the bankruptcy courts permission to "reaffirm" your mortgage loan and lease agreement and continue to make your home payments. Following is some chapter-specific information.

Chapter 7

Chapter 7 bankruptcy typically involves liquidation of all nonexempt assets. Exempt assets are listed on your Statement of Financial Affairs and are protected against seizure by your unsecured creditors. State and federal law dictates which assets can be claimed as exempt—depending on what state you live in, you may be able to choose either the state or the federal law. Some states allow for homestead exemptions, which exempts equity in your home from repossession. 

Chapter 13

If you file Chapter 13, you are likely to keep your home, assuming you don’t have a significant non-exempt equity. You can keep other non-exempt assets if you follow your payment plan. However, if you aren’t able to maintain your payment plan, your non-exempt assets may be liquidated to pay creditors.