Chapter 7 Bankruptcy – Can You Keep Your Home?

One of the first questions many homeowners who are facing bankruptcies ask is whether or not they can keep their home. Today’s laws allow many homeowners to do just this if they meet certain criteria. Even with Chapter 7 bankruptcy protection, you may be able to keep your home.

Chapter 7 bankruptcy is the type of bankruptcy that virtually eliminates all unsecured debts. There are some debts like back taxes that cannot be eliminated in this way, but most consumer debts like credit cards are wiped out. Filing this form is a bit more challenging with the current rules. You must pass a means test in order to file in this way, but if you can pass the test, you can get rid of your debts.

The problem with a mortgage is that it is a secured debt. This means that your home is backing the loan. You cannot keep your home while discharging the debt, because even if your personal liability is removed for the home, the bank still has the legal right to take back what they own if you have not repaid the loan as you agreed.

However, some people will choose to file Chapter 7 bankruptcy before they fall behind on their mortgages. They may be behind on every other bill, but will have done all they could to pay that mortgage on time every month. In these instances, it is possible to keep your home.

What you must do is reaffirm the mortgage with the bank. By signing a reaffirmation agreement, you are basically saying that you will continue to pay the loan. You can do this if you have not fallen behind or if you make the effort to bring your loan current. It also makes you once again legally liable for the debt of your mortgage.

There is another roadblock you must overcome to keep your home when filing in this way. This form requires the trustee to sell all of your non-exempt assets. Your home, or the equity in your home if you do not own it outright, is considered an asset.

Each state and the federal government have a list of exempt assets you can check. If your equity is less than the exempt amount for your state, or the federal exempt amount if your state allows you to use this option, then you can keep your home. If it is more, then you will have to allow the trustee to sell your home, and you will be given the amount of the proceeds from the sale to use to purchase other housing.

So can you keep your home if you file Chapter 7 bankruptcy? Yes, if your home is not worth more than the exemption amount and if your bank is willing to reaffirm the debt. Otherwise, you will have to surrender your home, either to the bank or two the trustee, and look for new housing. But with the weight of your debts off of your back, finding new housing you can actually afford might be easier after you file.