How bankruptcy can help save your home
Many of our clients that come to us are very concerned that if they pursue bankruptcy to get some debt relief that they will automatically lose their home. This is absolutely not the case. What matters is whether or not you're current on your mortgage payments, how much equity you have in your home and what type of bankruptcy you're filing – chapter 7 versus chapter 13. Here's what you need to know about keeping your house while getting debt relief on other liabilities that you owe.
Scenario: Chapter 7 if you're current on mortgage payments
If you are filing chapter 7 and are current on your mortgage payments, you should be able to keep your home. The main issue in this scenario is the amount of equity you have in your home. If you are a single bankruptcy filer, North Carolina consumers can shield up to $35,000 in equity in your home. If you are filing chapter 7 with your spouse, up to $70,000 in equity can be shielded. This allows most filers to fully protect their residence from being sold to pay their debts.
Scenario: Chapter 7 if you're behind on mortgage payments
If you are considering chapter 7 but are behind on your mortgage payments, the filing can help you in a couple of different ways. First, if you've already received a foreclosure notice, it can temporarily delay you losing your home. This will buy you a few months to try and catch up on your payments, work out a deal with your lender for lower repayments, arrange a short sale or find a new place to live. If you have significant equity in your home, trying to sell it or save it makes sense. But if you are upside down on it and/or have a second mortgage, it maybe wiser to let the home (and all the associated debt) go.
Scenario: Chapter 13 if you're current on mortgage payments
If you are current on your mortgage payments, your home will not be at risk from filing chapter 13. Instead, what it will do is give you more breathing room to catch up on your other bills. However, the exemption rules are still critical. If your equity exceeds the amounts of the North Carolina exemption mentioned above, you will still get to keep your home, but will have to pledge to pay more of your unsecured debts rather than simply having them discharged after your repayment plan. Also, if you're current on your payments, but have negative equity (i.e. owe more than what your home is worth) and have a second mortgage, we may be able to strip away the second so you'll owe less.
Scenario: Chapter 13 if you're behind on mortgage payments
If you are behind on your mortgage and are considering chapter 13, depending on how far you are behind, you may be able to keep your home. If you've received a foreclosure notice, filing will stop the immediate threat of losing your home. From there, what happens is that you'll have to pay your regular mortgage payment plus a portion of your arrears. This is calculated so that at the end of your repayment plan (between three to five years), you'll have caught up your back balance and will be completely current.