Most people are very concerned about their home and what happens to it if they file bankruptcy. There are only two options: you keep it or you lose it.
To keep your home you need to answer YES to the following questions:
- Do you want to keep the house? (Not everyone wants to keep their house. If you don’t then filing bankruptcy will allow you to “walk away” from a house).
- Is the mortgage current or if it is not current, have you negotiated a plan with your mortgage company to make it current? (Your mortgage is “current” if you aren’t behind in any of your payments.). If it is not current your mortgage company may have concerns about your ability to pay.
- Are your property taxes and utilities current? If they are not, your mortgage company may be concerned about the city or the utilities registering liens against your house.
- Do you have the ability to make your future mortgage, property taxes and utilities payments? Even if you’ve never missed a payment in the past, if it looks like you aren’t going to be able to make your payments in the future then your mortgage company may use your bankruptcy to cancel your contract (and that means sell your home).
- Can you afford to pay for the equity in your home? If you think that you may have equity in your home or you aren’t certain what this means then go to “What if there is equity in my home?”
If you answered NO (or even MAYBE) to any of these questions you should probably consider whether or not you can afford to keep the house you’re in. Keep in mind that when you file bankruptcy you no longer have to make payments towards your unsecured debts and therefore you may actually have more money available to pay your mortgage, property taxes and utilities. If you haven’t already done so, flip to our page on budgets to determine whether or not you have the ability to pay for your house.
If you answered YES to all of these questions then, in most cases, your house will not be affected by your bankruptcy. That’s not to say that your mortgage company can’t cancel your mortgage contract if you file bankruptcy – legally they can demand full payment. It’s just very unlikely that they will. The mortgage company makes their money off the interest that you pay (and not by selling houses). If you have been a good customer and you have the ability to continue making payments, then that’s what the mortgage company is going to want you to do.
It’s very important that you know your rights and responsibilities in regards to your secured creditors, including your mortgage, BEFORE you file bankruptcy. Be certain to discuss your situation in detail with your trustee.
What if there is equity in my house?
If there is equity in your home when you file bankruptcy then you’ll be required either to pay the trustee an amount equal to your equity or the trustee will be forced to seize and sell your home.
The following example demonstrates how a trustee might determine if you had any equity in your home.
“A real estate agent appraises your house at $150,000 and you owe the mortgage company $120,000. I’ve got $30,000 in equity, right?”
Not necessarily. The amount of equity in this house should be calculated as follows:
|Fair market value||$150,000|
|Less: Selling costs @ 6%||($9000)|
|Equity in the home:||$14,500|
In this particular example, the trustee would expect the bankrupt to pay $14,500 before their bankruptcy was completed, if the bankrupt wanted to retain possession of their home.
You should discuss the equity in your home and the required repayment terms with your trustee before you file your assignment.