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Will You Lose Your Home in a Chapter 7 Bankruptcy?

Buying a home is often the most expensive and most important purchase a person will make in their entire life. Therefore, when bankruptcy proceedings begin, many people wonder if their home will be lost during bankruptcy. Depending on each individual circumstance, a person will usually file for Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

Under Chapter 7 bankruptcy, a homeowner will be able to keep their home if they have no equity in the house, because a trustee would have no money to distribute to creditors after selling the house. Also, a homeowner can keep their home if the equity that they do have in the house is exempt under the homestead exception. However, if a homeowner files for Chapter 7 bankruptcy, they will need to keep making mortgage payments on their house or else they will lose their home.

Exemptions

What is an exemption? Under Bankruptcy law, an exemption is an asset or value of the asset that a debtor gets to keep after filing bankruptcy. Usually, bankruptcy is a federal issue, but exemptions are an area of bankruptcy that differs from state to state. Each state has chosen whether to maintain the exemptions in the federal Bankruptcy Code or to create its own exemptions for its citizens. California has chosen to create its own set of exemptions. For example, the two systems of exemptions a debtor can choose from in California are The California Code of Civil Procedure 704 or The California Code of Civil Procedure 703. When filing for bankruptcy in California, a debtor can only choose one system and cannot pick and choose exemptions or utilize both systems of exemptions at the same time.

Equity and the Homestead Exemption

Equity is the value of a home that exceeds all the encumbrances on the home. Equity is determined by subtracting the total value of all liens and encumbrances on the home from the market value of the house. Equity in a home is not stagnate and can change. If the value of your home rises then your equity will increase. However, a more likely situation in today’s poor market and economy is that the value of your home has fallen therefore your equity will also decrease.

A homestead exemption is an exemption that protects a certain dollar amount of equity in a home from creditors. Each state has its own rules for homestead exemptions and you should seek the advice of a qualified attorney to determine the homestead for your particular situation. For example, in Florida there generally is no homestead exemption limit, whereas in states like Pennsylvania there generally is no state homestead exemption. Below is brief look at the California Homestead exemptions, but a complete explanation of all the homestead provisions is beyond this article.

California Code of Civil Procedure 704

Under this system, a homeowner who is single and not disabled is given a homestead exemption of $75,000. A family is given a homestead exemption of $100,000 if no other member of the family has a homestead. If a homeowner is 65 years old or older or if the homeowner is physically or mentally disabled, then the homeowner is given a homestead exemption of $175,000. What do all these number mean? Here is an example to help clarify:

You are married and have a family (no other member of your family has a homestead).  You own a home worth $300,000, but you owe $200,000. This means your equity in the home is $100,000. If a creditor files a judgment lien on your home and succeeds on a forced sale, then you will typically get the $75,000 homestead exemption and the remaining $25,000 will go to the creditor. In this example, a creditor was able to force sell the home, however with the aid of a qualified attorney, a person can review all of their options and could possibly save their home.

California Code of Civil Procedure 703

Under this system, any unused portion of the homestead exemption may be applied to any property of the homeowner, totaling up to $20,725. This system is generally used by people who do not have a large amount of equity in their homes. Here is an example of a situation where you might want to use this system as opposed to section 704:

You are single and own a house worth $300,000, but you owe $295,000 on the home. This means your equity in the home is only $5,000. However, you have some cash or other property that would not ordinarily be exempt under bankruptcy proceedings. You can use this system to have that property or cash become exempt, which means you get to keep it.

Equity and the Homestead Exemption Summary

If a homeowner has a significant amount of equity in their home, which is not exempt from the homestead exception, a homeowner might lose their home, even if mortgage payments are current and up to date. However, under the homestead exception, a homeowner can keep some equity in their home without the threat of losing their home. The particular exemptions that are applicable to an individual and how much each exemption amounts to depends on numerous factors. It is best to consult with an experienced attorney to find out which exemptions are applicable to a particular individual.

Foreclosures

During a bankruptcy proceeding, even if a homeowner’s house is protected from being sold to pay creditors, a homeowner can still lose their house to foreclosure, if proper measures are not taken. A foreclosure is a process that is outside the normal bankruptcy proceedings and occurs when a homeowner is behind on mortgage payments. As a result, Chapter 7 bankruptcy is limited in its means to get out of a foreclosure and save your home. However, it is possible to save your home under a Chapter 7 bankruptcy when facing a foreclosure, but ordinarily a Chapter 13 bankruptcy is more practical.

Chapter 7: Automatic Stay and Foreclosures

Once a Chapter 7 bankruptcy petition is filed, all collections and foreclosure proceedings will temporarily stop under automatic stay,. This stoppage usually lasts for 2-6 months, but because the poor economy has resulted in so many foreclosures, it can be much longer. During this time, you can continue to live in your home. A lender will then make a motion to the court for relief of automatic say. If the court grants the motion, the foreclosure proceedings will begin again. However, a lot can happen during the automatic stay period and if a homeowner can show that he is current on his mortgage and can make the payments, the foreclosure will likely not go forward.

You Should Seek a Qualified Attorney

The risk of losing your home is serious. Failing to properly protect your home might result in you losing your home. There is no cookie cutter solution and every situation is different. If you are considering filing for bankruptcy or are currently in the process of a bankruptcy, you should immediately seek the advice and assistance of a qualified attorney.

Brett interns for The Cohen Firm, a bankruptcy law firm in Irvine, California. For further information regarding bankruptcy please contact Isaac Cohen, Esq. at 949-900-6700 or at icohen@thecohenfirm.com. Learn more about The Cohen Firm’s bankruptcy services by visiting their website www.thecohenfirm.com

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