What happens to home equity in bankruptcy?
In bankruptcy, if you own a home, you may wonder what happens to your home equity loan or primary mortgage. Generally, bankruptcy wipes out the mortgage loan but leaves the lien on the home. This can have a dramatic effect on the value of your home. The good news is that there are ways to protect your home equity.
Chapter 7 bankruptcy wipes out the mortgage loan but does not wipe out the lien
A lien is an interest in property that a creditor has that guarantees the debt. It lasts until the debtor pays off the loan in full. In most cases, a lien is voluntary but in some states, it can be involuntary. If a lien is involuntary, the creditor placed it without the borrower's consent.
A Chapter 7 bankruptcy does not wipe out a lien on home equity but does eliminate a mortgage loan. The amount of debt that can be discharged depends on the state. In some states, you can choose your own exemption list and choose how much of your property is exempt. This is useful if you don't want to give up your home in foreclosure.
If you have a HELOC, you can use it to pay off some debt. Since it's not secured against the primary mortgage, your home value will probably increase or stay stable. Therefore, a Chapter 13 filing may help you repay a portion of your HELOC debt, and the rest of your debt will be discharged once the case is resolved.
Chapter 13 bankruptcy can protect your equity in a flexible way
If you owe money on your home but are unable to make the payments, you may qualify for protection with a chapter 13 bankruptcy. This type of bankruptcy allows you to strip your lien on your home. To qualify for this type of protection, the lien must be wholly unsecured, meaning that the proceeds from the sale of your home would not be enough to cover all or part of the lien.
When you file a Chapter 13 bankruptcy, you must dedicate a portion of your disposable income toward paying back your debt, while also paying off your other debts. The repayment plan generally lasts between three and five years. Once the repayment plan has been completed, any unsecured debt that remains will be discharged. This includes child support and student loans.
Exemptions for real estate used as a home in bankruptcy
In bankruptcy, certain properties can be excluded. These properties include those with liens. As long as the property is used as a home, it is exempt. However, if you have a mortgage on it, you can only be exempted up to $5,000. The rest of the property will be dealt with in your bankruptcy case.
You can also keep other property that is essential to your livelihood. This can include your car and tools, a computer, and necessary medical supplies. Similarly, your house, furnishings, appliances, and household goods may also be exempt. Other items that can be exempted include artwork and musical instruments. These items do not have to be valuable in order to be exempted, but they should be valuable enough to be resold.
However, the extent to which you can keep certain types of property in bankruptcy may vary greatly from state to state. The level of exemptions depends on where you live, but federal laws generally allow a lump-sum property exemption.
If you have any questions, you can get a free consultation with Ascent Law LLC:
Ascent Law LLC:
8833 South Redwood RoadSuite C
West Jordan, UT 84088
(801) 676-5506
