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Will I Lose My House if I File Chapter 13?

Will I Lose My House if I File Chapter 13?

House Ownership and Chapter 13 Bankruptcy

Filing for bankruptcy does not automatically mean that you lose your house. Bankruptcy is designed to help individuals manage their debts while keeping their assets. You can get better payments with your creditors and save your property, including your house, when you file for bankruptcy.

Whether you retain your house in bankruptcy is determined by a number of factors. The foremost is the type of bankruptcy you file. Chapter 13 bankruptcy allows you to set up a repayment plan to catch up on missed mortgage payments, giving you a better chance of keeping your home.

Another important factor is your home equity. This is the difference between how much your house is worth and how much you still owe on it. If your home has a lot of equity, some or all of it might be at risk. Exempt equity is the part of your home’s value you can protect during bankruptcy. This varies by state. In some cases, states allow you to protect the entire value of your home equity, which could make a big difference in retaining your home.

The key to keeping your house is your ability to make mortgage payments. If you cannot make your monthly mortgage payments after filing for bankruptcy, your lender could still foreclose on your home. Even under Chapter 13, where you have the opportunity to catch up on late payments through a repayment plan, you will need to show the court that you have enough income to cover both your current mortgage and any missed payments.

House Ownership and Chapter 13 Bankruptcy

Understanding Chapter 13 Bankruptcy

If you file a Chapter 13 bankruptcy, you can pay your mortgage with a repayment plan and retain your assets.

When you file for Chapter 13, you propose a repayment plan to the court, which typically lasts between three to five years. This plan allows you to catch up on missed mortgage payments and other debts while staying in your home. The key is that your income must be sufficient to meet the repayment obligations under the plan. Here’s what generally happens with your mortgage:

Payment of Mortgage Arrears

Arrears are the overdue payments. If you are behind on your mortgage payments, Chapter 13 allows you to pay off the arrears over the duration of the repayment plan. You do not have to pay them all at once. Chapter 13 allows interest-free repayment of arrears.

As long as you keep making your regular mortgage payments in addition to the arrears under the plan, you should be able to keep your home. [1]

Current Mortgage Payments

If you want to keep your house, you will have to stay current on your mortgage payments after filing under Chapter 13. If you fall behind on these, the lender can ask the court for permission to foreclose on your home, even while you are in bankruptcy.

Current Mortgage Payments

Lien Stripping from Unsecured Loans

The concept of lien stripping comes into play when your property is worth less than the primary loan balance. This can occur if the value of your property drops significantly. Chapter 13 can help you remove the lien from unsecured loans.

The second mortgage is considered an unsecured debt, which could be discharged or wiped out at the end of your bankruptcy. [2]

Automatic Stay on Assets

As soon as you file for Chapter 13 bankruptcy, you get an automatic stay. This prevents the creditors from hounding you for the collection of debts. It also prevents the foreclosure of your house. When you obtain an automatic stay, the mortgage lender has to stop any foreclosure proceedings. This temporary relief lasts for the duration of your repayment plan. Under Chapter 13, this is three to five years.

An automatic stay can give you breathing room by keeping your house, but you must understand that it is not a permanent solution. You must propose a workable repayment plan and then stick to it; otherwise, you risk the automatic stay being lifted. [3]

Homestead Exemption and Protection of Equity

If you do not want to lose your house, you must protect your equity. The homestead exemption law can help protect your equity from creditors. Home equity is calculated as the difference between what you still owe on your house loan and the value of your house.

The amount of equity you protect is called exempt equity. Anything left unprotected is known as nonexempt equity. Under Chapter 13, you must pay this amount as part of your repayment plan. The federal and state laws on homestead exemption let you protect a part or all of your home equity. [4]

Homestead Exemption and Protection of Equity

What Could Cause You to Lose Your House?

Although Chapter 13 is structured to help you keep your home, there are certain scenarios where you might still lose it. These include:

Failure to Make Plan Payments

Once your repayment plan is approved, you must make all the payments as scheduled. If you default on these payments, your bankruptcy case could be dismissed, which would allow creditors to resume foreclosure actions.

Inadequate Income

If your income is not sufficient to cover both your ongoing mortgage payments and the arrears outlined in the repayment plan, your case may not be approved. Or, even if it is approved initially, you might struggle to keep up with payments later.

Increased Mortgage Payments

If your mortgage has an adjustable rate, your monthly payments could rise during your bankruptcy plan period, making it harder to stay current on payments.

Lender Relief from Stay

If you fail to meet the terms of your mortgage or the repayment plan, your lender can file a motion to lift the automatic stay, allowing them to continue foreclosure proceedings.

Chapter 13 bankruptcy can let you keep your house under certain conditions. If you fail to meet the terms of the repayment plan, your lender can still foreclose on your home. The best course of action is to work with a bankruptcy attorney.

Lender Relief from Stay

If you are interested in filing for Chapter 13 bankruptcy, contact Richard West today for a free consultation.

FAQs

Yes, Chapter 13 helps you keep your house by allowing you to catch up on missed mortgage payments through a repayment plan.

Depending on state laws, it protects part or all of your home equity from creditors.

If you do not keep up with payments, your lender may request the court to allow foreclosure.

Consult with your bankruptcy attorney to explore options like modifying your payment plan or mortgage terms.

Sources:

[1] Can you file bankruptcy and keep your house? (n.d.). Point Blog. https://point.com/blog/can-you-file-bankruptcy-and-keep-your-house

[2] O’Neill, C. (2024, January 30). Getting Rid of Second Mortgages in Chapter 13 Bankruptcy. www.nolo.com. https://www.nolo.com/legal-encyclopedia/rid-second-mortgage-chapter-13-bankruptcy.html

[3] Chapter 13 – Bankruptcy Basics. (n.d.). United States Courts. https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics

[4] The Homestead Exemption Under Bankruptcy Law. (2023, October 18). Justia. https://www.justia.com/bankruptcy/exemptions/homestead-exemption/

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