How to Protect Your House Through Bankruptcy

One of people’s major fears when it comes to bankruptcy is losing their home. They do not want to be left with nowhere for their family to live. Generally, only those who file for Chapter 7 bankruptcy are at risk of losing their home. This is because Chapter 7 involves liquidating your assets (including real estate) and using the proceeds to pay your creditors. Fortunately, there are ways to ensure that your house is protected during bankruptcy. 

Choosing Between State and Federal Exemption

When trying to exempt any property from bankruptcy, including your house, you will have to choose between using a state and federal exemption. This is not a decision that should be made lightly. You want to be sure you are picking the one that will do you the most good. Obviously, the state exemption will vary depending on which state you reside in. For example, in Pennsylvania, there is no homestead exemption. This means that most Pennsylvania residents will want to use the federal exemption when it comes to protecting their house. 

Federal Homestead Exemption

The federal homestead exemption allows you to protect your primary residency during Chapter 7 bankruptcy. However, whether or not it will allow you to keep your home depends on the amount of equity you have in it. The equity limit is $31,575 for a single person or $63,150 for married couples filing jointly who co-own the property. If the amount of equity you have in your home is less than or equal to this limit, the home cannot be sold to pay your creditors. If the amount of equity you have is over this amount, your home can be sold. If this should occur, you will be given the equity limit in cash once the home has sold. 

The Risk of Chapter 7 Bankruptcy Filing

If you want to keep your home, filing Chapter 7 bankruptcy is a significant risk. For many people, the equity they have in their home is well over the limit set by the federal homestead exemption, meaning it is very likely that Chapter 7 can take your home away from you. Additionally, Chapter 7 can take other property, including cars, personal property, and almost anything of significant value that you own. This is the main risk of Chapter 7 bankruptcy, that you will be left to start a new life with almost nothing to your name. For many people, this is a terrifying prospect. 

Alternatives to Chapter 7 Bankruptcy

If you want to be sure to avoid losing your house, there are alternatives to Chapter 7 bankruptcy. These alternatives include: 

• Debt Consolidation: This involves combining multiple debts into a single loan, ideally with a lower interest rate. This can simplify payments and potentially reduce monthly expenses, making your debt much more manageable.

• Debt Settlement: This involves negotiating with creditors to settle your debt for less than the full amount owed, usually in exchange for a lump-sum payment. However, creditors are not obligated to provide this as an option. It should also be noted that it may involve tax obligations on the forgiven debt. 
• Chapter 13 Bankruptcy: Unlike Chapter 7, Chapter 13 bankruptcy does not involve the selling of your property. Instead, you work with the bankruptcy court to create a payment plan. For 3-5 years, you will make a monthly payment to a court trustee, who will then disperse the payment among your creditors. This is a longer process than Chapter 7, but will allow you to keep your house and other property.

Not all of these options will be available to everyone, but they are worth looking into. One of these alternatives could ensure that you get to keep your home. 

Tenancy by the Entirety

A final option for protecting your home is provided by tenancy by the entirety. This is a legal term, which means that in a marriage, the home is not owned by either individual but by both of them. Under tenancy by the entirety, if only one spouse declares bankruptcy, the marital home cannot be sold to pay off creditors. Of course, this protection will not work if the spouses file bankruptcy jointly.