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Chapter 7 Bankruptcy And Your Home: What You Need To Know

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If you feel like you will never be free of debt, one option that you may explore is filing for bankruptcy. There are two common types of bankruptcy: chapter 7 and chapter 13. Chapter 13 bankruptcy is actually a debt consolidation plan, while chapter 7 bankruptcy discharges all of your allowable debts within a matter of months. If you are interested in filing for chapter 7 bankruptcy, you need to understand how it affects your home. Read on to understand your options for keeping or getting rid of a home when you file for chapter 7 bankruptcy.

Your Options If You Want to Keep Your Home

You can keep your home when file for chapter 7 bankruptcy; however, it is essential that your mortgage payment is affordable for your income. You should be up to date on your mortgage payments. If you are up to date on your mortgage payments, you have the option to reaffirm your mortgage and omit the loan from your bankruptcy proceedings. When you reaffirm your mortgage, you basically agree to keep making the payments according to the terms of your loan.

If you are behind on your mortgage payments, but want to keep your home, consider filing for chapter 13 bankruptcy instead. Chapter 13 bankruptcy lets you bring your late mortgage payments up to date over a period of three to five years.

One detail that you need to pay attention to is the amount of equity that you have in your home. Many states permit you to exempt a certain amount of home equity using a homestead exemption, and you can exempt even more equity by using a wildcard exemption (if allowed by your state). A wildcard exemption lets you exempt any type of equity that isn't already exempted by your state's bankruptcy laws. If you have equity that exceeds these exemptions, your bankruptcy trustee may require you to sell your home and use the proceeds to help pay down your debts.

What You Should Do If You Don't Want to Keep Your Home

If your current mortgage payment is not affordable or if you don't want to keep your home, you can surrender your home when you file for chapter 7 bankruptcy. One of the benefits to surrendering your home in a chapter 7 filing is that your lender is not allowed to sue you for the difference between what you owe on the home and the amount that the lender recovers by selling the home. Instead, this deficiency is discharged with the rest of your debts. 

To surrender your home, tell your bankruptcy attorney your intentions. You will be given the appropriate form to fill out so that the trustee will know what you want to do with the home.


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