Protecting Your Home in Bankruptcy: What You Need to Know
If you’re considering bankruptcy to alleviate debt and you’re a homeowner, you’re likely wondering: Can I keep my house? The good news is that laws are in place to protect homeowners, and your ability to keep your home depends on the type of bankruptcy you file, your home equity, and the laws in your state.
Understanding Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” helps individuals overwhelmed by debt who can no longer make payments. When you file Chapter 7, a court-appointed trustee sells your assets to pay off unsecured debt. However, you can protect certain assets, like your home, by filing an exemption with the bankruptcy court. To keep your house, you’ll need to file a homestead exemption, which protects your home equity during bankruptcy.
Homestead Exemptions: What You Need to Know
A homestead exemption is a law that protects your home equity during bankruptcy. The federal homestead exemption is $27,900 for individual taxpayers and $55,800 for joint taxpayers with a home in both spouses’ names. However, some states have higher or lower homestead exemptions. For instance, Arkansas, Florida, Iowa, Kansas, Oklahoma, South Dakota, and Texas have unlimited homestead exemptions, while states like New Jersey, Kentucky, Missouri, Pennsylvania, Tennessee, and Virginia have lower exemptions.
Keeping Your Home in Chapter 7 Bankruptcy
To keep your home in a Chapter 7 bankruptcy, you must be current on your mortgage payments and file a homestead exemption. If your mortgage balance exceeds the home’s market value, you’ll likely be able to keep your home. However, if your home equity exceeds your state’s maximum exemption, the bankruptcy trustee will sell your home to pay your creditors.
Chapter 13 Bankruptcy: An Alternative Option
Chapter 13 bankruptcy, also known as a wage earner’s plan, allows you to submit a plan to the court to repay your debt over three to five years. This type of bankruptcy offers homeowners more options to keep their home. The homestead exemption rules in Chapter 7 also apply to Chapter 13, but the difference is how the bankruptcy court treats the leftover equity. In Chapter 13, if you have $40,000 in home equity and a $20,000 homestead exemption, the $20,000 difference is added to your debt repayment plan to pay off your unsecured creditors.
Can You Buy a House After Bankruptcy?
If you’ve filed for bankruptcy in the past, you can still buy a house in the future. However, the type of mortgage product and your credit score will impact your ability to qualify for a loan. Bankruptcies can stay on your credit report for seven to 10 years, depending on the type filed, which can affect your credit score. Lower credit scores usually translate to higher interest rates on mortgages.
Mortgage Options After Bankruptcy
The type of mortgage product can determine how soon you can step back into homeownership. Here are some common types of mortgages and the time you’ll have to wait from your bankruptcy discharge date to apply for a loan:
- FHA loans: 2 years for Chapter 7 and 1 year into a repayment plan for Chapter 13
- VA loans: 2 years for Chapter 7 and 1 year into a repayment plan for Chapter 13
- USDA loans: 1 to 3 years
- Conventional mortgages: 2 to 4 years
In Summary
If you file bankruptcy, it is possible to keep your home. While laws vary by state, you can generally keep your home if your home equity is less than the allowable homestead exemption in your state. With Chapter 7, you must be current on mortgage payments to be eligible to keep your home. With Chapter 13, you don’t have to be current, but you need to bring payments current during the repayment period set by the bankruptcy court. Depending on the type of mortgage, you could be eligible to get another mortgage between one and four years following the discharge of your bankruptcy.
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