It is a widespread misconception that you cannot declare bankruptcy if you possess valuable assets or that bankruptcy will lead to losing all your assets, including your home. While filing for bankruptcy can result in losing your home, this outcome is not inevitable. Whether or not you can keep your house depends on several factors.

It is advisable to learn of the potential loss of your home, the protection offered by bankruptcy exemption laws on your home equity, and the differences between Chapter 13 and Chapter 7 bankruptcy in protecting your home before filing for bankruptcy.

Is it Possible to Lose a House You Own When Filing for Bankruptcy?

Yes, you can lose your home if you own it when filing for bankruptcy. However, it depends on various factors, including the portion of home equity, the status of mortgage payments, and the ability to make payments during and after the bankruptcy process. The outcome of keeping or losing a house can also be influenced by bankruptcy exemption laws and the type of bankruptcy you choose to file (Chapter 7 or Chapter 13).

You will lose your house if you cannot meet the monthly payments or get caught up with your previous missed payments.

Bankruptcy Exemptions that Protect Home Equity and Help You Preserve Your Home

Bankruptcy exemptions refer to specific laws that protect a filer's assets, including their home equity, from being seized during the bankruptcy process. These exemptions aim to help filers preserve their assets and maintain living standards after bankruptcy. The extent of protection offered by these laws varies by jurisdiction, but they can play a crucial role in helping filers keep their homes and maintain their home ownership.

Bankruptcy Exemptions

Chapter 7 bankruptcy exemptions determine which assets a filer can keep and which must be sold to pay creditors. Chapter 7 bankruptcy is often referred to as liquidation bankruptcy, as the filer's non-exempt assets could be sold to pay creditors. However, the exemptions can help protect a portion of the filer's assets, including their home equity, personal property, and tools of the trade.

Chapter 13 bankruptcy exemptions play a different role. Chapter 13 is known as reorganization bankruptcy, where the filer agrees to a repayment plan to pay off their debts over three to five years. In Chapter 13, exemptions determine how much the filer must pay their creditors and how much they can keep for themselves. The exemptions help ensure that the filer has enough resources to pay their debts and maintain their standard of living during the repayment period.

Bankruptcy Exemptions in Chapter 7 and Chapter 13 Concerning Home Ownership

In California, the bankruptcy exemptions for Chapter 7 and Chapter 13 are similar regarding home ownership. The California homestead exemption provides significant protection for a filer's primary residence. Previously, the homestead exemption protected a filer's home equity up to $75,000 for a single filer and $100,000 for a married couple filing jointly. However, as of 2021, Assembly Bill No. 1885 protects a filer’s home equity with the new minimum set at $300,000 and the maximum at $600,000.

This means that if the value of your home is less than the exemption amount, you can keep it in Chapter 7 bankruptcy.

In Chapter 13 bankruptcy, the homestead exemption can protect the filer's home from being sold as long as they continue making their mortgage payments and adhere to their repayment plan. This allows the filer to keep their home and continue paying off their mortgage over a three to five-year repayment period.

These exemptions are subject to change, and the specific rules and limits could vary depending on your circumstances.

How to Find Bankruptcy Exemptions for Your Home and Other Properties in California

To find bankruptcy exemptions for your home and other properties, you can follow these steps:

  • Review the California Code of Civil Procedure — The California Code of Civil Procedure contains exemption laws, including those for bankruptcy. You can find the relevant sections by searching for California bankruptcy exemptions.
  • Review the federal bankruptcy code — The federal bankruptcy code provides the general exemptions that apply in bankruptcy proceedings. You can find the relevant sections by searching for federal bankruptcy exemptions.
  • Consult with a bankruptcy attorney — An experienced bankruptcy attorney can provide you with specific information on the exemptions that apply to your situation and assist you in using them to your advantage.
  • Utilize online resources — Various online resources provide information on bankruptcy exemptions, including non-profit organizations, legal organizations, and government agencies' websites.

How Can Homestead Exemptions Protect Home Ownership?

A homestead exemption is a legal provision that allows individuals to protect a portion of their equity in their primary residence from being seized by creditors in bankruptcy proceedings. This means that the equity in your home, up to a certain amount, is protected. Thus, it cannot be sold to pay creditors. The purpose of the homestead exemption is to allow filers to keep their home and maintain their standard of living after filing for bankruptcy.

By claiming the homestead exemption, filers can avoid the sale of their home, even if they are behind on their mortgage payments. In some cases, the homestead exemption could also help filers keep their home if they face foreclosure. In a Chapter 13 bankruptcy, the homestead exemption can help the filer keep their home and avoid the sale of their property, as long as they adhere to the terms of their repayment plan and continue making mortgage payments.

Wildcard Exemption

The wildcard exemption is a flexible exemption that allows debtors to protect any property or asset that is not otherwise exempt under state law.

In the context of home ownership, the wildcard exemption, Code of Civil Procedure 703.140(b)(5), protects a portion of the equity in a debtor's primary residence if the homestead exemption is insufficient to cover the property's total value. This can be important for debtors who have a higher amount of equity in their home than is allowed by the homestead exemption.

By using the wildcard exemption, debtors ensure that their home is protected from being sold to pay off creditors in a bankruptcy proceeding.

Is it Possible to Lose Your Home If You Are Not Exempt?

In both Chapter 7 and Chapter 13 bankruptcy, a filer's house is at risk if it is not exempt or fully covered by the homestead exemption.

Chapter 7

In Chapter 7 bankruptcy, a filer's non-exempt assets, including their house, could be sold to pay off creditors. If the value of the filer's house exceeds the homestead exemption amount, the trustee could sell the house and use the proceeds to pay creditors. The borrower can keep the house if they can pay the trustee the value of the non-exempt equity.

Chapter 13

Under Chapter 13 bankruptcy, a filer's house is generally not at risk of being sold if they are current on their mortgage payments, and the homestead exemption fully covers the value of their house. However, if the filer is behind on their mortgage payments, the lender could initiate foreclosure proceedings, and the filer could lose their home even in Chapter 13 bankruptcy.

Chapter 7 Bankruptcy if You Own a Home

In Chapter 7 bankruptcy, simply exempting your home equity is not enough to keep it. You must also keep up with your mortgage payments before and after filing for bankruptcy. If you fall behind on payments, the lender could have two options to take back the home:

  • Lenders can request the court to lift the automatic stay, allowing a forecloser during the case, or
  • They can wait until the end of the Chapter 7 case to foreclose on the property.

Bankruptcy's Automatic Stay Stops Foreclosure

The automatic stay is a legal protection when you file for bankruptcy. It provides an immediate and automatic stop to most collection actions and foreclosure proceedings against you. The automatic stay is in effect as soon as you file your bankruptcy petition and can temporarily relieve the threat of losing your home to foreclosure.

However, it is worth noting that the automatic stay is temporary and can only last throughout the bankruptcy case. Therefore, it is crucial to remain current on your mortgage payments and comply with other bankruptcy requirements to ensure that the stay remains in effect and to have the best chance of retaining your home.

An experienced bankruptcy attorney can help you understand the specifics of the automatic stay and how it applies to your situation.

Using Chapter 13 Bankruptcy to Protect Your Home

Chapter 13 bankruptcy can provide several benefits for homeowners struggling to keep up with their mortgage payments. Here are a few ways in which Chapter 13 bankruptcy can help protect your house:

  1. Repayment Plan

A repayment plan is a critical component of Chapter 13 bankruptcy and can effectively protect a person's home from foreclosure. In a Chapter 13 bankruptcy, the individual submits a plan to repay their creditors over three to five years. The bankruptcy court must approve the plan. Further, the plan must meet specific requirements, including being feasible and providing for the payment of priority debts.

One of the main benefits of a Chapter 13 repayment plan is that it allows individuals to catch up on missed mortgage payments throughout the plan. This is accomplished by making the missed payments a part of the individual's regular monthly payment, which is paid to the bankruptcy trustee. The trustee then distributes the sums to the mortgage lender.

Chapter 13 bankruptcy can also give individuals additional time to catch up on mortgage payments by temporarily halting foreclosure proceedings. This can give the individual peace of mind and allow them to focus on their financial recovery without the added stress of losing their home.

  1. Automatic Stay

Like Chapter 7 bankruptcy, filing for Chapter 13 bankruptcy will trigger an automatic stay, which provides immediate protection from foreclosure proceedings.

  1. Lower Monthly Payments

In Chapter 13 bankruptcy, you can lower your monthly mortgage payment by restructuring other debts, freeing up more money to put toward your mortgage.

Chapter 13 bankruptcy allows people with a regular income to reorganize their debts and pay off their creditors over three to five years. This type of bankruptcy offers several benefits, including lower monthly payments.

Under Chapter 13 bankruptcy, the individual works with a bankruptcy trustee to create a repayment plan based on their income and expenses. The plan typically involves reducing or eliminating interest on some debts and spreading payments over time. This can significantly lower the monthly payment amount the individual is responsible for.

  1. Stripping Liens

If you have a second mortgage on your home that is worth less than the value of your home, Chapter 13 bankruptcy could allow you to strip the lien and eliminate the debt. This move can make it easier to keep your home.

Stripping a lien in Chapter 13 bankruptcy refers to eliminating a second or junior mortgage from a debtor's property when the property's value is lower than the balance of the first mortgage. This means that the lien can no longer be enforced against the property, and the debtor is only responsible for paying the first mortgage. The process of stripping a lien is only available in Chapter 13 bankruptcy and requires a court order.

  1. Pay for Any Non-exempt Equity

In Chapter 13 bankruptcy, the courts could require you to pay for any nonexempt equity in your home as part of your repayment plan. Non-exempt equity is the portion of your home equity that exceeds the limit allowed by your state's bankruptcy exemptions.

In a Chapter 13 case, you pay this nonexempt equity to your unsecured creditors to protect your house and reduce your debts.

Each bankruptcy case is unique, and the specific benefits you receive depend on your circumstances. An experienced bankruptcy attorney can help you understand how Chapter 13 bankruptcy can protect your house and whether it's the right option for your specific situation.

Bankruptcy Trustees Abandoning Homes in Bankruptcy

The trustee could determine that your home is not worth the effort and expense of selling and could choose to abandon it instead. This is known as the abandonment of property.

Abandonment typically occurs when the value of an asset is less than the costs associated with selling it.

For example, if the expenses of selling a home, like real estate commissions and transfer taxes, exceed the expected sale proceeds, the trustee abandons the home and allows the owner to keep it.

The decision to abandon an asset is entirely at the trustee's discretion and depends on each case's circumstances. Here are some of the factors the trustee takes into consideration:

  • The appraised value of the property.
  • The cost of selling the house, which includes expenses including repairs, sales commissions, and inspections.
  • The amount that must be paid from the sale proceeds, including tax, mortgages, property taxes, mechanic's liens, the exemption amount, and the trustee's commission.
  • Whether the trustee should share some of the proceeds with a co-owner of the property.

Substituting Exempt Property

Substituting exempt property is when a debtor can replace a property initially pledged as collateral for a loan with a different, exempt property of equal or greater value. This allows the debtor to retain the exempt property and avoid surrendering it to the bankruptcy estate.

In the context of home ownership, this could mean, for example, that a debtor who initially pledged their house as collateral for a loan could substitute the equity in the house with another exempt asset, like a retirement account, to protect their home from being taken by the bankruptcy trustee.

Substituting exempt property is generally only available in Chapter 7 bankruptcy and is subject to certain restrictions and limitations. Consult with an experienced bankruptcy attorney to determine whether this option is available in your case and whether it is the best strategy for protecting your assets in bankruptcy.

Find a San Diego Bankruptcy Attorney Near Me

Filing for bankruptcy when you own a home can be a complex process, as there are many factors to consider in protecting your home and other assets. The type of bankruptcy you choose, either Chapter 7 or Chapter 13, will impact your home's level of protection.

It is in your best interest to do research and consult an experienced bankruptcy attorney to understand the laws and exemptions that apply to your case. This way, you can make an informed decision on the best way to protect your assets, including your home, and ensure the best possible outcome in your bankruptcy case.

If you are considering filing for bankruptcy and you own a home, take action to protect your assets and start on the road to financial stability. Consult the San Diego Bankruptcy Attorney to learn about your rights and options and to devise a strategy to secure your financial future. Call us at 619-488-6168 for more information.