There are many reasons American homeowners file for bankruptcy. Some file after extended unemployment or the death of a spouse. Others file for bankruptcy protection to avoid judgment liens being placed against their home.
Regardless of your specific reasons for seeking bankruptcy protection, it's vital you understand how owning property affects your case and restricts your options.
The Two Types of Bankruptcy Protection
There are two different types of individual bankruptcy cases and the one you choose will determine what happens to your property.
The two bankruptcy protection options individuals can file are:
- Chapter 7 bankruptcy
- Chapter 13 bankruptcy
There are state laws, federal laws, and means testing that dictate which chapter you are eligible to file under and what exemptions apply based on the things you own.
For this reason, a bankruptcy attorney will need to look at your unique circumstances and advise you of your options in the state where you reside.
However, before meeting with a bankruptcy law attorney, it is important you understand the differences between Chapter 7 and Chapter 13 bankruptcies as they relate to real estate.
Here's what you need to know about each option:
Chapter 7 Bankruptcy and Real Estate Ownership
Bankruptcy law allows many homeowners the choice of saving their homes or letting them go during the bankruptcy process.
Chapter 7 bankruptcy is the option for homeowners with
- little or no home equity
- mortgage debt exceeding the current market value of the home
- foreclosure proceedings in progress
If the homeowner wants to save the property from foreclosure or seek relief from the home being sold in foreclosure, then Chapter 7 bankruptcy allows for this.
Additionally, sometimes Chapter 7 bankruptcy is advantageous because you can get rid of an otherwise unsellable property where you owe more on it than the property's worth.
Chapter 13 Bankruptcy and Real Estate Ownership
Homeowners who have a lot of equity or who own property that isn't their primary residence often don't qualify to file for Chapter 7 bankruptcy. However, most do qualify to file for Chapter 13 bankruptcy.
If you own rental, investment, or vacation property you want to keep, then filing Chapter 13 will provide you the option of retaining ownership. If you have mortgages on these types of properties, then you will have to reaffirm your commitment to making the monthly payments.
Finally, if you own an investment or vacation property and it is underwater, your bankruptcy lawyer can ask the court for something called a "cramdown". A cramdown is where the bankruptcy court lowers the outstanding mortgage to bring it in line with the current value of the property. This option is only available under the Chapter 13 bankruptcy option.
For more information, contact a bankruptcy attorney near you.