If you are a homeowner who is considering bankruptcy because of overwhelming debt and burdensome calls from debt collectors, you are likely wondering how a bankruptcy filing could impact your living situation. Here are important things to keep in mind in regards to bankruptcy filing and homeownership.
Is Bankruptcy Right for Me if I Own a Home?
If you make enough income to pay your monthly mortgage but are struggling to do so due to other debt, filing for bankruptcy may be a viable option for you. Specifically, if you have unsecured debt such as credit cards and medical bills that eat into your ability to pay your mortgage, Chapter 7 may be an option. In California, recent legislation upped the caps on homestead exemptions. Filing Chapter 7 bankruptcy could allow your unsecured debt to be wiped clean, which lightens your monthly expense load.
In other words, filing Chapter 7 bankruptcy may make it easier to keep your home. The law allows for certain types of personal property, such as homes and personal vehicles, to be exempt up to a certain amount so that you continue to have shelter, transportation, and the ability to live and make an income. Eliminating other debt means you reduce the amount of your outgoing monthly expenses, which makes it easier for you to pay for the most important items, such as mortgage, utility, and potentially a car payment.
What’s the Difference Between Secured and Unsecured Debt?
Unsecured debt is debt that isn’t secured by collateral. Medical bills and credit cards are examples of unsecured debt because a medical company can’t come and take back its medical treatment to recoup a loss. Credit cards are largely the same.
Secured debt, on the other hand, provides collateral. A bank can take back a car or house if you don’t repay the loan, getting some of its money back. You may keep property paid for by a secured debt as long as you are able to maintain payments.
What if I Can’t Maintain Payments on Secured Debt?
If you can’t afford to make monthly payments on your secured debt even after the unsecured debt is eliminated, you generally have two choices. First, you can include those lenders in your Chapter 7 bankruptcy filing. Doing this protects you from the obligation to pay any deficiency balances on secured debt.
Another option is to file Chapter 13, which allows you up to five years to catch up on your payments in order to keep your home. To do this, however, you need to make enough income to afford the regular mortgage payment in addition to catch-up payments.
Is My Home Safe No Matter What?
No, not entirely if you live in California. Whereas some states exempt personal residences no matter what, California only exempts such property up to certain amounts. The state recently upped the amounts; however, the exemption amount may be less than the amount of equity you have in the home. If the amount of equity you have exceeds the allowable exemption, the bankruptcy trustee can use the equity as a source to pay back creditors.
Where Do I Go From Here?
Filing bankruptcy while still keeping your home is not only possible, but most people are able to do so successfully. That being said, every case varies, and your personal situation determines how this plays out for you. Let Brent George Law know if the information here was helpful to you or if you have questions. As always, we are here to help.