For most of us, the largest purchase we will ever make is the family home. Indeed, it is the primary way that we grow wealth in America, which is why so many are worried about it when they file for bankruptcy. However, when you are overwhelmed by debt, you may think you have little choice but to give up the family home.
The two typical options
For most bankruptcy filers, there are two types of bankruptcies: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is the most well-known type where assets are sold to payoff your debts. In Chapter 13 bankruptcy, instead of selling items to pay off debts, if you have enough income, you reorganize your debts into a payment plan that will last for 3-5 years. At the end of that payment plan, any remaining debt is discharged.
How does Chapter 7 bankruptcy affect the family home?
In a Chapter 7 bankruptcy proceeding, whether the home is maintained or sold depends on the amount of home equity and your West Virginia homestead exemption ($25,000 per person or $50,000 per married couple filing jointly). Your home equity refers to the difference between what you own on your mortgage (and any other liens) and the market value of the home.
If you are current on your mortgage, can still make your payments and your home equity is equal to or less than your homestead exemption, you can likely keep your home after your Chapter 7 bankruptcy discharge.
If there is equity above your homestead exemption amount, the bankruptcy trustee may push to sell the home to pay off creditors.
How does Chapter 13 bankruptcy affect your home?
If you have a large amount of home equity, are current on your mortgage and can still make your mortgage payments, a Chapter 13 bankruptcy may be your best option, if keeping the family home is your primary concern. This is because, as long as you continue making your mortgage payments and pay off any past due payments as part of your payment plan, you can usually keep the family home in a Chapter 13 bankruptcy. This process can also be used to stop foreclosure proceedings, restructure your debt and catch up on your missed mortgage payments.
To be clear, the 3-5 years of life in the repayment plan are hard. Every bit of your income, except those funds needed for necessary living expenses, are used to pay off your debts.