Bankruptcy: The Advantages and Disadvantages for Homeowners
By Ted Ricasa
In the minds of many homeowners that have fallen behind in their mortgage payments or have been served with a Notice of Intent to Foreclose by their lenders, bankruptcy is the easiest way to get out from under their debts. If you are considering bankruptcy, it is important that you understand both the advantages and disadvantages that bankruptcy will have in your particular case.
As a homeowner contemplating bankruptcy, you should consider:
- Whether you want to keep your home
- Whether you can afford to keep your home by making timely mortgage payments during and after the bankruptcy process
- The amount of equity, if any, you have in your home
- Whether and when you realistically expect your financial situation to improve
- Your financial goals for the future and how best to achieve them
In some cases, bankruptcy truly is the best option for homeowners. However, all too often, people rush into bankruptcy in order to halt harassment from lenders and creditors without properly considering their rights and options.
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As a homeowner, what are my bankruptcy options?
The most common types of bankruptcy available to homeowners are Chapter 7 and Chapter 13. In order to qualify for Chapter 7 bankruptcy, you must pass what is called a Means Test, which is used to determine how much (if any) of your monthly income can reasonably be applied to the payment of your debts. Those who do not pass the Means Test are generally restricted to Chapter 13 bankruptcy.
Both types of bankruptcy offer unique advantages and disadvantages to homeowners, depending on their circumstances.
What is Chapter 7 bankruptcy?
The goal of Chapter 7 is to eliminate a debtor’s unsecured debts. Common examples of unsecured debt include credit card balances, lines of credit, unpaid medical and utility bills, and debts purchased by collection agencies. Generally, debts such as these are discharged (that is, they are forgiven) through Chapter 7 bankruptcy.
Secured debts, or debts that are backed by collateral that can be repossessed upon failure to repay the debt, may also be eliminated through Chapter 7 bankruptcy – provided that the debtor is willing to return that collateral to the creditor. This is an important point for homeowners to understand. While you are under no legal obligation to make your mortgage payments after your Chapter 7 bankruptcy has been finalized, your lender has the right to take possession of your home.
If your current monthly income falls below the median for a household of your size in your particular state, you are automatically eligible for Chapter 7 bankruptcy. Otherwise, in order to qualify for Chapter 7 bankruptcy, you must pass a Means Test. This test is used to measure a debtor’s “disposable income” after specific living expenses are deducted from his or her monthly income. How these variables are determined in your case depends on many factors, including where you live and the size of your family.
You will remain liable for any debts that are not discharged through Chapter 7 bankruptcy.
What are the advantages of filing for Chapter 7 bankruptcy as a homeowner?
In most cases, Chapter 7 bankruptcy is not advisable to homeowners who want to keep their homes. It may be possible to keep your home if you qualify for Chapter 7 bankruptcy, but it may not be in your best interests. If you earn a steady income and can reasonably expect to repay your debts over a period of three to five years – while continuing to make timely mortgage payments – then Chapter 13 reorganization of your debts is probably a superior option, even if you qualify for Chapter 7 bankruptcy.
If you are confident that you will be able to make your mortgage payments once your unsecured debts have been discharged, then you may find some benefit in declaring Chapter 7 bankruptcy. For example, if your house is either in foreclosure or at high risk of foreclosure, your Chapter 7 filing will halt that process and buy you some time. During this time, you may be able to enter into a reaffirmation agreement with your lender, which could allow you to resume your mortgage payments and keep your home. If you are confident in your ability to make these payments in a timely manner, then Chapter 7 bankruptcy could potentially be a good option for you.
What are the disadvantages of filing for Chapter 7 bankruptcy as a homeowner?
If you have significant equity in your home, then there is a good chance that you will not be able to keep your home regardless of your ability to make timely mortgage payments. When you declare bankruptcy, a trustee will be appointed to determine whether you have any non-exempt property that can be liquidated in order to repay your creditors. If you have little to no equity in your home, then it cannot be sold by your trustee. Although it varies from state to state, a certain amount of homeowner equity is considered exempt in bankruptcy. However, if your equity exceeds that exemption, the trustee appointed to your case can sell your home and use the proceeds to repay your creditors.
In the vast majority of Chapter 7 bankruptcies, there are no non-exempt properties to liquidate. However, the foremost priority of the trustee is to identify assets that can be sold to repay debts. The trustee must act impartially, but is obligated to maximize the revenues generated from the sale of non-exempt properties, including your home.
Even if you do enter into a reaffirmation agreement with your lender and are allowed to keep your home, you remain at risk for foreclosure. If you fall behind in your payments, you could find yourself with both a bankruptcy and a foreclosure on your record, putting your future financial security at serious risk.
What is the “homestead exemption”?
This is the amount equity in your home that can be protected from creditors. The homestead exemption varies from state to state. Before you file for Chapter 7 bankruptcy, be sure that you understand the homestead exemption and other protections potentially afforded to you as a homeowner in your state.
What is Chapter 13 bankruptcy?
Although classified as a type of bankruptcy, it may be easier to think of Chapter 13 as a means of restructuring your debts. In Chapter 13, debts are not immediately discharged as they would be in Chapter 7. Rather, a repayment plan is submitted for approval to the bankruptcy court. The length of the plan will be between three and five years, depending on the amount of disposable income earned each month by the debtor.
If you file for Chapter 13 reorganization and the court approves of your repayment plan, you must abide by the terms of that plan for its duration. Payments are made to the trustee appointed to the bankruptcy and distributed among creditors as stipulated by the plan. At the end of the term of the plan, any remaining unsecured debts are discharged, leaving the debtor responsible only for secured debts and whatever unsecured debts that were amassed after bankruptcy.
Chapter 13 bankruptcy is potentially ideal for people who can afford to maintain possession of their assets – such as their homes, but also including cars, boats, and other non-exempt property – but need financial relief in order to repay their debts.
What are the advantages of filing for Chapter 13 bankruptcy as a homeowner?
If you feel confident in your ability to abide by the terms of your repayment plan, Chapter 13 bankruptcy could be a potentially ideal solution to your current financial problems – and allow you to keep your home. Indeed, many homeowners who make regular mortgage payments after filing for Chapter 13 bankruptcy are able to refinance their mortgages before the expiration of their plans.
Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy allows you to potentially keep your home even if you have fallen behind in your mortgage payments. Your past-due payments can be factored into your debt repayment plan. Also unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy allows homeowners to avoid mandatory liquidation of their homes, regardless of the equity they have in them.
As with Chapter 7 bankruptcy, once you file Chapter 13 bankruptcy, the foreclosure process is immediately halted. However, if you are delinquent in your payments as outlined in your repayment plan, the bankruptcy court can permit your lender to resume foreclosure.
What are the disadvantages of filing for Chapter 13 bankruptcy as a homeowner?
Simply stated, Chapter 13 offers protection for homeowners only if they abide strictly by the terms of their repayment plans. In order to keep your home and other assets, you must make your full payments on time each month. If you foresee any reason that you will be unable to make these payments, then it may not be in your best interests to keep your home, whether you file for bankruptcy or not.
If you are unable to live up to the terms of your repayment agreement because of a temporary hardship or financial emergency, you may be able to work out an extension of your plan with the courts. Likewise, if your financial situation worsens over the course of your plan, it may be possible to request a modification of the plan. You will still be responsible, however, for your mortgage payments if you wish to maintain ownership of your home.
Under certain circumstances, you may be able to convert your Chapter 13 bankruptcy to a Chapter 7. At that point, however, your home may become subject to sale by a trustee to satisfy your debts.
What can Fast Home Help do to assist me if I am considering bankruptcy?
First and foremost, Fast Home Help can evaluate your situation and advise you as to whether bankruptcy is in your best interests, or even if maintaining ownership of your home is in your best interests. Our team of real estate and financial experts can explain your options, including the possibility of avoiding both foreclosure and bankruptcy through a short sale. Our goal is to empower you with the knowledge and information you need to make the best possible decision regarding your home under the circumstances you are facing.
You are invited to request a no-obligation all-cash quote for your home. If we are able to extend an offer, we may be able to free you immediately from the financial pressure of your monthly mortgage payment. If your mortgage is your primary financial obstacle, we may even be able to help you get back on your feet without having to file for bankruptcy.
If we do determine that you may benefit from filing Chapter 13 bankruptcy, we will advise you as such. Ultimately, we want you to make the decision that is best for you, your family, and your community.
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If you decide not to work with Fast Home Help but remain interested in pursuing bankruptcy, we strongly suggest that you seek counsel from a reputable, qualified attorney who is knowledgeable in bankruptcy law and real estate law to ensure the preservation of your rights.
For further information about your rights and options as a homeowner considering bankruptcy, please contact Fast Home Help today.
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