If you own your home (meaning the deed to the land where the home is located is titled in your name), an important issue in deciding whether to file bankruptcy will if and how the bankruptcy will affect ownership of your home. The effect your bankruptcy filing has on your home depends on a few factors. They include:
- Whether you can afford to keep your home.
- What type of bankruptcy case you file.
- The value of your home; and
- The amount of mortgage debt on your home.
Your Home in a Chapter 7 Bankruptcy
A Chapter 7 bankruptcy affects homeowners differently depending on the amount of mortgage debt owed on the property.
If the mortgage debt is equal to or more than the value of the property, a Chapter 7 debtor has two options: 1) surrender the house back to the mortgage lender and discharge the mortgage loan. Discharging the loan means the Chapter 7 bankruptcy will protect you from having to pay any of the mortgage loans, even if the mortgage lender does not recover the entire loan balance when the home is later sold at a foreclosure; or 2) keep your house by reaffirming (meaning that you agree in writing to continue to pay the loan amount) the mortgage debt and keep making loan payments to the mortgage lender as usual.
If the mortgage debt is less than the value of the property, a Chapter 7 debtor must determine how much equity value exists in the home. Equity value is the value of the home minus the mortgage debt. For example, if your home is worth $100,000, and you owe a $70,000 mortgage loan, then there is $30,000 of equity value. If you have too much equity, your home may be sold by the Chapter 7 trustee in your case. However, Georgia law (at O.C.G.A. § 44-13-100) provides exemptions that allow you to legally protect some equity value and prevent a sale of your home by the Trustee. This exemption is known as the homestead exemption:
For a case filed by a single unmarried debtor, the homestead exemption is $21,500. This means you can up to $21,500 equity and the Trustee would not sell your house.
For a joint case filed by two debtors who are married or a case filed by a single debtor who is married, the exemption is $43,000. This means if you can have up to $43,000 equity in your home and the Trustee would not sell your house.
Be careful: If you file a chapter 7 case and the equity value in your home is more than the amount you are allowed to exempt as stated above, your home could be sold by the Chapter 7 trustee in your case. For this reason, a chapter 7 case is known as a “liquidation bankruptcy,” because your home and other assets you own that have equity value that is more than you are allowed to exempt may be sold or liquidated by the chapter 7 Trustee.
Your Home in a Chapter 13 Bankruptcy
Unlike a chapter 7 case, a chapter 13 case is not a liquidation case. That is, there is not a Trustee in a chapter 13 case who is appointed to sell or liquidate your property. Instead, a chapter 13 case is a repayment bankruptcy. A chapter 13 case requires a chapter 13 repayment plan to be filed in the court. Under the repayment plan, you propose a way to pay what you owe. The plan may combine all of your debts into a single payment. Often, the plan payment includes vehicle loans, furniture accounts, loan company loans, income taxes, past-due mortgage payments, and unsecured debts such as credit card accounts, signature loans, and medical bills. Many chapter 13 cases are filed to allow a debtor to save their home from being lost due to foreclosure by the mortgage lender. Under the chapter 13 plan, you may take up to five years to pay back secured claims, including past-due mortgage payments. During the time you are in a chapter 13 plan, you must make monthly payments to the chapter 13 Trustee. Chapter 13 Trustee uses the money to pay your debts according to the chapter 13 plan. During the plan, you are paying off your vehicle loans, furniture accounts, or catching up on past due mortgage payments. During the time you are in chapter 13 case, you are legally protected from creditors trying to collect money or contact you about the money you owe. If you have a mortgage loan and you want to keep your home, you would continue to pay the regular monthly mortgage payment, in addition to the chapter 13 plan payment. The chapter 13 case is designed so that when your chapter 13 plan is completed, loans for vehicles and furniture, for example, are paid off. In the case of past-due mortgage payments, completion of the plan means that all past due payments are caught up. After the plan had ended, you continue to make the regular mortgage payment.
If you have an equity value that is more than the exemption amount in a chapter 13 case, you do not lose your house provided that you can pay the amount of the non-exempt equity value to the Trustee for the benefit of unsecured creditor claims in your case. For example, if you have non-exempt equity in your home (or in any other property or asset), your Chapter 13 plan requires that you “pay” a dividend to unsecured creditors equal to the amount that is the non-exempt equity value in your home or other property. The amount of dividend you pay in a chapter 13 case is based on how much your unsecured creditors would receive if your house or other property was sold in a chapter 7 case. For example, if you owe $10,000 in unsecured debt and you have $10,000 of non-exempt equity in your home or other property, then your chapter 13 plan would provide that you pay during the term of the plan (which can be over a 3 to 5 years period) all of the $10,000 unsecured debt as a dividend to those creditors.
If you have no equity in your home and you file a Chapter 13 bankruptcy case, you will continue to make payments to the lender as usual. You are typically not allowed to include home loan payments in your Chapter 13 plan. The exception to that rule is if the entire loan balance can be paid off through the plan before the plan ends. And remember, the maximum time allowed for a Chapter 13 plan is 60 months (5 years).
Filing a bankruptcy case may affect your home or other property or assets you own significantly, or it may have no effect, depending on the equity value in your home and other assets/property and whether you file a chapter 7 or chapter 13 case. You should consult a bankruptcy lawyer to review your specific circumstances before filing a bankruptcy case to determine your legal rights and the effect that filing bankruptcy will have on your home and other property or assets.
If debt is making you feel overwhelmed, we’re here to help put your mind at ease. Contact Kelley, Lovett, Blakey & Sanders at 1-800-371-4188 or fill out the easy-to-use contact form on our website. With over 30 years of experience and three locations across Georgia, we are the experts in strategically guiding you toward financial freedom.