Bankruptcy Question: Can I Keep My Home if I File?

If you’re considering filing for bankruptcy, then your list of debtors is probably pretty lengthy. And your list of financial concerns, even longer. To complicate matters further, there are many different types of bankruptcy a person can file. So, beyond deciding if filing is the right move, you must also discern which bankruptcy type best suits your situation. We recently received the following question from a reader: “Can I keep my home if I file for bankruptcy? If yes, how?”

This is a totally reasonable concern since no one wants to add homelessness to their already tricky situation.

The good news is that you can probably keep your home if you qualify to file for Chapter 13 bankruptcy. But you need to know what it entails.

Understanding Chapter 13 Bankruptcy

When most people think of filing for bankruptcy, they usually assume it means they must give up everything they own. And in the case of Chapter 7 bankruptcy — also known as “liquidation bankruptcy” — this is more-or-less true.

With Chapter 7, a person agrees to sell off their assets to pay off as much debt as possible. The court then dismisses the remainder of the filer’s debts. This “clean slate” bankruptcy is more extreme but it’s also a faster financial reset. Typically, Chapter 7 cases are complete in about four months, but you will lose a good deal of your belongings.

However, there are other less aggressive options available for individuals who wish to retain some of their personal property. This means real estate and otherwise. Enter Chapter 13 bankruptcy.

The difference between Chapter 7 and Chapter 13 bankruptcy is that the latter involves a repayment plan. With Chapter 13 bankruptcy, it’s more of a debt restructuring similar to Chapter 11 for a corporation. The caveat is the person filing still has to have enough income to pay their monthly mortgage and then some.

When filing for Chapter 13 bankruptcy, an individual submits a repayment plan to the court, and then they must agree to pay off that plan in three to five years. Chapter 13 usually works best for people who have stable income to make some payments on debts. They are filing for bankruptcy, however, because they don’t have enough income to pay all their debts as currently structured. This is frequently the case for people with heavy medical or credit card debt.

How Can Filing for Chapter 13 Help Me Keep My Home?

When you file for Chapter 13 bankruptcy, the court places an automatic “stay” on your home. This immediately stops the lender from foreclosing and kicking you out. If you are behind on your mortgage payments, you must file Chapter 13 before a foreclosure sale occurs. Otherwise, it’ll be too late for you to benefit from bankruptcy protection laws to save your property.

If it grants your Chapter 13 petition, the court will assign you an officer called a “bankruptcy trustee.” The trustee will be responsible for making sure you stay on track during your Chapter 13 repayment process. It functions a little like a consolidation loan in this manner. You will pay your trustee each month, and the trustee will pay your creditors. This will continue until you have met the parameters of your Chapter 13 agreement in full.

To stay in your home, you must pay your mortgage every month, plus some portion of the payments you missed. You must also pay a monthly percentage of any priority secured debts, like car loans and taxes. But unsecured, nonpriority debts — such as medical and credit card debt — are only partially paid.

If you stick to your three-to-five-year Chapter 13 repayment plan successfully, the court discharges those partially-paid debts at the end. It won’t erase your home loan. But ridding yourself of other crushing debts through this process should make you better able to handle future mortgage payments.

That’s why Chapter 13 is best suited for people with steady employment who just got behind on their bills. The restructuring allows them to make up the amount “in arrears” a little bit at a time.

What If I Miss a Mortgage Payment While in Chapter 13?

If “keep my home” is your goal, you really don’t want to miss payments. While you are in a Chapter 13 bankruptcy, your mortgage lender will still have a lien on your property. If you default on your restructured monthlies, the lender will once again have a right to foreclose.  

First thing to do if you miss payments while in Chapter 13 is contact your lawyer. You need to alert them as to what is going on ASAP. Are you missing payments because of illness, or perhaps a temporary loss of work? Let them know immediately! Then your attorney can petition the court to excuse your tardiness and address ways to also make up those payments.

Don’t have a lawyer? Wherever you are in the filing process, it would behoove you to schedule a free consultation with a bankruptcy attorney. Bankruptcy law can be very complicated and with all the different components, you may need assistance to prevent accidentally defaulting. Don’t have an attorney yet? We can match you with one for a free, no-obligation consultation by phone.

You don’t want to lose everything that you’re trying to save. Especially if you’re hoping to keep your home sweet home.