When foreclosure help is needed, time is usually of the essence. Homeowners in this situation do not have the luxury of trying different options to see which one works. They may know that Chapter 7 bankruptcy will help them discharge unsecured debts. However, they may also be aware that to repay these debts, they may have to give up property.
Chapter 7 bankruptcy is a last-resort way to discharge debt amassed through loans and credit cards and save your home. It allows a debtor to write off most debts and begin fresh after a short time. However, it also affects the credit score and typically requires giving up property. The good news is that, in many cases, Chapter 7 bankruptcy can delay foreclosure.
Chapter 7 bankruptcy and your home
Faced with the prospect of being homeless, most borrowers do whatever it takes to stop foreclosure. Filing for bankruptcy is one way to do this but certain types of bankruptcy are more effective than others are. For example, for individuals who plan to walk away from their homes, Chapter 7 can temporarily stop foreclosure, allowing them to remain in the properties longer. But filing for Chapter 13 bankruptcy is more likely to save your home from foreclosure.
However, this is not to say that Chapter 7 is not worth filing when facing foreclosure. Individuals who are current with their first mortgages and want to keep their homes can use Chapter 7 to cancel other debts. This will free up money to apply to the first mortgage. If the mortgage balance exceeds the value of the home, Chapter 7 bankruptcy can temporarily eliminate second or third mortgage payments. This type of bankruptcy wipes out second and third mortgage debts, eliminating these mortgage holders from the list of creditors.
The Homestead Exemption – see if your home can be exempt from foreclosure
The homestead exemption is a common exemption for a Chapter 7 bankruptcy filer. This is designed to protect the home and is typically subject to a dollar limit. The federal homestead exemption is a maximum of approximately $20,000. Homestead exemptions vary widely by state. For example, Kentucky law permits up to $5,000 in property value plus $3,000 in personal property to be designated as homestead. New York allows up to $10,000 of property value under the homestead designation. Each state allows for a different amount of the homestead exemption to help save your home and still allow you to erase all kinds of debt.
Through a two-step process, homeowners can determine the likelihood of property sale by a Chapter 7 bankruptcy trustee. Determining the amount of the homestead exemption is the first step. Residents of some states may use the federal homestead exemption, and most states offer their own homestead exemptions based on dollar value. A bankruptcy lawyer can help a homeowner determine which exemptions apply and the relevant exemption amount.
The next step involves determining whether there is enough nonexempt equity in the home to trigger property sale during Chapter 7. Nonexempt equity is equity that is not protected by any applicable homestead exemption. Begin with the market value of the home and deduct the homestead exemption amount, trustee commission on the difference between the two figures, cost of sale, mortgage balance, and balances of property-secured nonmortgage liens. If the result is a negative number, there is not sufficient equity to trigger sale of the home.
Talk with a lawyer to see if Chapter 7 makes sense for you
Chapter 7 bankruptcy erases debt and this makes it the preferred choice for many people drowning in credit card bills and loan repayments. Homeowners should consult a lawyer to determine whether filing for Chapter 7 will put their houses at risk. Getting expert legal advice prevents unexpected outcomes of the bankruptcy process. Most people don’t realize that it is possible to file bankruptcy and still save your home–but it just may be the relief you are looking for!