Can I file chapter 7 and keep my house?
Exemptions can save a home from foreclosure in Chapter 7 bankruptcy.
One of the main reasons that people believe they should file a Chapter 13 case in U.S. Bankruptcy Court, rather than the more commonly used Chapter 7, is to save the family home from foreclosure.
A debtor who falls behind in mortgage payments is able to stave off foreclosure for a much longer period in Chapter 13. During the three to five years that a court-ordered repayment plan is in effect, a foreclosure is put on hold along with other collection efforts and lawsuits by creditors.
However, while a Chapter 7 case is generally concluded in a few months - with an automatic stay to halt collections for just that long - there are many exemptions allowed under state and federal law that are large enough to cover a secured debt, such as a house mortgage or a car loan.
Only when the home or car's value is greater than the exemption is the debtor forced to sell the property along with other assets to pay the debt, according to BankruptcyHome.com.
The point of bankruptcy is to free people who are overwhelmed by debt from further obligations, as long as they use all their assets not covered by exemptions to pay back their creditors. But property that is important to the debtor's ability to maintain a normal lifestyle is given the largest exemptions possible.
"Even though every bankruptcy case has to be evaluated separately, it would be safe to say that in most cases the debtor does not have to give up their property or possessions," the website states. "The reason for this is that the law allows a comfortable amount of property exemptions."
Bankruptcy attorneys point out that exemptions vary widely from state to state and that each jurisdiction determines whether state or federal exemptions should apply in individual cases.
There is a middle ground that allows Chapter 7 filers to voluntarily pay mortgages or car loans - which cannot be discharged in bankruptcy - and other debts they don't wish to include in the court action. "Reaffirming" such debts allows them to continue making payments so they can keep their property, rather than liquidate it to pay off creditors.
Bankrate.com states that one positive aspect of payments made under a reaffirmation agreement is that they are reported to credit bureaus, allowing debtors to rebuild their credit rating more quickly once the bankruptcy is decided.
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