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Everyone Should Learn a Little about Law

What Happens To Your Home In A Chapter 13 Bankruptcy?

1 December 2014

Kaylee Wells

If you've begun to fall behind on your regular bills, and fear that you'll never be able to catch up, you may be considering filing for bankruptcy protection with the help of a site like http://wfactorlaw.com. However, you likely also want to help reorganize your finances while creating a minimal disruption to your everyday life. You may be concerned that filing bankruptcy will cause you to lose your home. There's no need to let these fears prevent you from filing -- in general, you'll be allowed to keep your home, even after filing for bankruptcy. Read on to learn more about how your home is treated after you've filed for Chapter 13 bankruptcy protection, as well as whether you'll be able to qualify for future mortgages.

What is the difference between Chapter 13 and Chapter 7?

The term "bankruptcy" can be used to refer to Chapter 7, Chapter 11, or Chapter 13 bankruptcy. These are named for the chapters of the bankruptcy code in which they are found, and offer very different options for the discharge and reorganization of debt.

• A Chapter 7 bankruptcy is deemed a "discharge" bankruptcy. In general, to file for a Chapter 7 bankruptcy, both your income and your debts must be below a certain threshold. These debts will be discharged, and any assets used to secure debts (such as cars or electronic items) will be liquidated to pay your creditors.
• A Chapter 13 bankruptcy is a "reorganization" bankruptcy. In this proceeding, you're put on a strict budget. You are allotted a certain amount of your net monthly income for non-debt items (like food, utilities, and clothing) and remit the remainder of your pay to the bankruptcy trustee, who uses it to pay your debtors in order of priority.
• A Chapter 11 bankruptcy is similar to a Chapter 13 bankruptcy, but applies to corporations rather than individuals. In some cases, a sole proprietorship whose business assets are secured by personal assets can file a Chapter 11 bankruptcy instead of a Chapter 13.

Even if you otherwise qualify for a Chapter 7 bankruptcy, you may choose to go with a Chapter 13 bankruptcy instead, particularly if your debt level is relatively low. If you don't adhere to the Chapter 13 payment plan, this plan will then convert to a Chapter 7 discharge.

How is your home treated in a Chapter 13 bankruptcy?

Because your mortgage (along with any second mortgage or home equity loan or line of credit) is secured with your home's equity, this claim is given priority over other unsecured claims, like credit card debt. In general, the Chapter 13 payment plan put forth by the bankruptcy trustee will include the full value of your mortgage -- ensuring that you remain in good standing with your mortgage company during the duration of your bankruptcy.

If you owe more on your home than it is worth, you may opt to let it go during the bankruptcy. In this case, the excess amount owed becomes an unsecured claim, and your lender goes to the back of the line to collect. For this reason, it is in your lender's best interest for you to remain in your home.

Will you be able to apply for mortgages in the future?

The good news is that -- whether you give up your home voluntarily or it is sold at a foreclosure or bankruptcy sale -- you'll be able to apply for a new mortgage fairly quickly. In some cases, with FHA and other types of mortgages backed by the federal government, you can even receive a new mortgage while you're still in the bankruptcy process. In other cases, you must wait one to two years before applying for a new mortgage.

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