Chapter 7 Bankruptcy Mortgage Rules

Home Equity

To determine whether the homestead exemption will protect your home you must first calculate your home equity. Your equity is the amount by which the value of your home exceeds the outstanding balance on your mortgage. So, if your home is worth $100,000 and you owe $75,000 on your mortgage center equity is equal to $25,000. If you compare your home equity to your homestead exemption and your equity is higher, then the trustee will likely sell your home, give you cash equal to your homestead exemption and then use the balance to pay your debts. But if the numbers are close or if your equity is less than the homestead exemption then you will not lose your home in liquidation.

If you qualify to file for Chapter 7 then your home may be safe from liquidation if your home equity is less than the homestead exemption in your state. Each state has a different homestead exemption so you will need to check the details in your particular state. Generally, as of January 2011, the homestead exemption ranges from $5000 (Alabama) to unlimited value (Florida and Nevada). The federal homestead exemption, which is an option in most states, is $20,200.

In certain situations you may be able to plan ahead for bankruptcy by taking out an additional mortgage loan on your home to decrease the home equity below the homestead exemption level. This is a sensitive planning process that can potentially be viewed as fraudulent by the bankruptcy judge, so it is best to consult an experienced bankruptcy attorney before taking this step. If your equity is high enough then Chapter 13 may be the best option because there is no risk you will lose your home under Chapter 13.

A mortgage loan involves two legal contracts, which are the promissory note and the mortgage lien. Importantly, bankruptcy does not discharge your mortgage lien. This means that, as a practical matter, your mortgage remains intact even after your bankruptcy ends. If you don't make your payments, your lender can foreclose because it still has a lien on your property. As a result, debtors with mortgages can reaffirm the mortgage, which basically means you enter into a new loan agreement that reaffirms and reinstates the original loan agreement. The practical effect of this process is that your mortgage remains exactly as it was before you filed for bankruptcy.