I Own My Home – Should I file a Chapter 7 Bankruptcy?

home saved through bankruptcy

Probably not.

Most of my clients who own their homes are driven to file bankruptcy because they are behind in mortgage payments on their home loans.

If you are behind on mortgage payments for your home loan, DO NOT file a Chapter 7 case!  The lender will respond by seeking permission from the Bankruptcy Court to foreclose on your house.   This is called a Motion for Relief from Stay.
If you wish to keep your home and you are behind on payments, you will need to file a Chapter 13 case to create a Payment Plan to catch up on the arrearage (back amounts owed) and to make regular payments going forward.   If you need a loan modification, filing a Chapter 13 case may be your best bet to set up conditions which could result in the lender accepting a lower monthly payment.
Even if you are current on your home loan payments, it is only a good idea to file a Chapter 7 case if you have little or no equity in your home.
This is because: in California, the typical homesteader is allowed up to a $75,000 exemption. If you want to keep the house, and you have more than $75,000 in equity in the house, the Chapter 7 Trustee is entitled to the unexempt amount of equity.  You will have to pay the Chapter 7 Trustee this amount of money so that the Chapter 7 Trustee can pay creditors.   If the unexempt equity is large enough and you do not have other exempt property to pay the amount, the Chapter 7 Trustee may elect to sell your house to realize the unexempt equity and pay your creditors.
You would be entitled to the $75,000 that you have claimed in the homestead exemption, but you would lose your house.   Not a good idea.  This is true for any other unexempt property you may own, whether cash, cars or investment properties.
It is true that these days, most of my clients have no equity in their homes because the amount owed on the home loan (or multiple home loans) exceeds the current value of the home.   For these homeowners, and for those who have a small amount of equity (lower than the applicable exemption amount) filing a Chapter 7 case might be a good idea.
Still, if you have negative equity, in part because you have a second or third loan on your home (including a HELOC – Home Equity Line of Credit), a Chapter 13 Bankruptcy case would be better because you can get rid of the unsecured junior liens by completing a Chapter 13 Bankruptcy Case. However, according to a 1992 decision by the United States Supreme Court, you cannot strip  a junior lien in a Chapter 7 case.*

When determining if you have equity in your home, be realistic about the current value.  Many of my clients are surprised to find out how much lower the current value is compared to when they got their last home loan.

In sum, if you:

  1. have little or no equity in your home, AND
  2. can pass the Means Test (as discussed in my previous blog post, “Do I Make Too Much Money to File a Chapter 7 Bankruptcy?,”), AND
  3. are current on your home loan payments,

filing a Chapter 7 Bankruptcy may be a good idea if you just need to get rid of unsecured debts such as credit card debts, medical or dental bills, legal or similar bills, and personal loans.  And this may help you stay current on your home loan.

It is possible that you may be entitled to a larger California exemption than the $75,000.  You must consult with an experienced bankruptcy attorney who can analyze your situation and advice you on how to proceed.
Otherwise, if you are behind on loan payments or if you have substantial equity, or if you need to get rid of unsecured junior liens so you can afford to pay the first mortgage, a Chapter 13 Bankruptcy is the way to go.  You need an experienced Chapter 13 bankruptcy attorney.
If you or your attorney has mistakenly filed a Chapter 7 case and your home loan lender is seeking permission to foreclose by filing a motion for relief from stay, you do have the chance to convert to Chapter 13, but you must act quickly.   It is not too late to hire a bankruptcy attorney who can take your case into Chapter 13.



*(See Dewsnup v. Timm (1992) 502 US 410, 412, 417, 112 S.Ct. 773, 776, 778 – Sec. 506(d) does not provide authority for debtor to strip liens in Chapter 7 cases).

One Response to I Own My Home – Should I file a Chapter 7 Bankruptcy?
  1. […] in the lender seeking permission from the Bankruptcy Court to foreclose on your house. See my post “I Own My Home: Should I file Chapter 7?” for more […]

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