Will I Lose my House if I File for Bankruptcy?
When determining whether or not to file for bankruptcy, the home is often a main consideration. Keeping your home while filing for bankruptcy depends on several factors:
- How much equity you have in your home
- The type of bankruptcy—chapter 7 or chapter 13
- State laws on homestead exemption
Equity in the home
If your home equity is exempt, the bankruptcy trustee will not attempt to sell your home, whether you are filing a chapter 13 or a Chapter 7 bankruptcy in Chicago. Equity is calculated by subtracting home sale costs, payoff balances, and lien amounts from the current market value of the home.
Chapter 7 vs. chapter 13
In a chapter 7 bankruptcy, the trustee sells assets to pay creditors; whereas in a chapter 13 bankruptcy a wage earner’s plan is created, debt is restructured, and the trustee collects your payment for creditors every month. Because of the difference in how these two bankruptcies are managed, there is a greater likelihood of losing your home in a chapter 7 bankruptcy. People with substantial equity in their homes usually decide to file a chapter 13 bankruptcy. During chapter 13, an automatic stay is in effect, which goes on for three to five years. The stay prevents mortgage companies from foreclosing on your home, and you are given extra time to catch up on mortgage payments. However, if you fail to make your mortgage payments, or if the bank forecloses before you file a chapter 13 bankruptcy petition, you could still lose your home.
State laws on homestead exemption
While bankruptcy is handled at the federal level under the U. S. Bankruptcy Code, states have jurisdiction over allowable exemptions that may be claimed during bankruptcy. Each state has a list of property exemptions. Property that you select as exempt is detached from the estate during bankruptcy—meaning creditors cannot seize or demand sale of that property for payment.
Illinois limits the homestead exemption to $15,000 for two people living in the same home and $7,500 for one person. If your equity in the home is greater than these amounts, you stand to lose it in a chapter 7 bankruptcy.
Jay Fortier is a bankruptcy law firm in Chicago who previously worked as a financial advisor for a large, national financial advisory firm. He also serves as an associate real estate broker with Sky High Real Estate, INC and is a licensed REALTOR™. His financial experience helps him guide clients to go beyond bankruptcy and understand how they became insolvent, helping them to plan for future solvency.
