Keeping Your Home in Bankruptcy
Updated: Jun 22, 2020
A lot of people are under the misconception that they cannot keep their home when they file for Chapter 7 bankruptcy. This is far from the case. In fact, none of our clients have ever lost their homes simply because they filed for bankruptcy. Used properly filing for Bankruptcy is a good strategy to keep your home.
First thing to remember is that nothing could or should happen to the first mortgage in a bankruptcy. I say this because there have been several potential clients who actually believed that if they file for bankruptcy the first mortgage, the mortgage they used to buy the home in the first place would somehow disappear and they would get to keep the house for free. You don't lose the house, you don't get the house for free either. You just get to keep paying the mortgage without other creditors breathing down your neck. That's as good as it gets.
Remember the purpose of a bankruptcy is to give you a “fresh start”. Not to throw you out broke and naked into the street or give you a massive windfall. As a result, there are numerous exemptions in bankruptcy When you hear the word exemption that is referring to the things that you can keep after the bankruptcy. Each state has different rules regarding exemptions and there is also a Federal exemption which can be used in various circumstances. In Connecticut you can keep up to $75,000 of the equity in your home; if you are married and your spouse is on the deed you can keep up to $150,000.00 in equity (a good reason why your spouse should be on the deed with you). That means that if your home is worth $200,000 and you have $75,000 mortgage left on your house, if you and your spouse are on the deed your home is well protected in the bankruptcy proceeding. The value of your home would have to be well over $225,000 for you to start worrying about losing it.
Also, if you have liens against the property from judgment creditors those liens can be removed from the property by filing a motion before the bankruptcy judge. Many of our clients don’t realize that that summons and complaint that they received from a credit card company that is slowly turning into a judgment will now be slapped onto their home as if it were a second mortgage. If they try to sell their home in the future the money that they thought would be theirs from the equity in the home will be used to pay off a credit card that they long forgot about. To top it off a judgment lien is valid for 20 years and will include attorneys fees and interest that the credit card company says you owe. Worst than that the judgment creditor may even be able to foreclose on the home once there is enough equity in it.
We had a case where a woman had over $100,000 in liens against her home. Her husband had quitclaimed the property to her but not before he borrowed over $100,000 against the property before the divorce was finalized. Luckily, none of creditors had an actual mortgages, he just filled out forms stating that he owned the property and failed to mention that his wife was also on the deed. We were able to show the court that the house was only worth $86,000 and there was a $30,000 mortgage on the property. The house would have to be worth over $105,000 for her home to be in danger. As a result, the judge removed all the judgement creditor's liens on the property and now she owns the home free and clear as if she had never had a judgment on the property at all.
The most important part of this process is getting an accurate appraisal of your property. Many people believe that the value of their property is much higher than it actually is because they rely on valuation sites like Zillow, Trulia, Homes.com etc. Unfortunately, these real estate sites valuations are extremely inaccurate to the point of being useless. Even getting a CMA (Comparative Market Analysis) from a Real Estate Agent will be of little use to you. Anyone involved in the real estate industry wants you to believe that your home is worth more than it actually is hoping that you will retain them to sell your home and make a commission off of you. In the case above Zillow had stated that the property was worth $250,000. We were able to get a good private appraiser to actually enter the property, discover all of the problems that the property had, compare to the real world value of nearby property and produce a report showing why the property was worth a lot less than that which it had been valued at by other sources.
If you find yourself drowning in credit card debts, overwhelmed by medical bills or being harassed by debt collectors and are afraid that you will lose your home, you need to see a good lawyer who knows the ins and outs of bankruptcy law. Someone who can sit down with you and figure it out with you.