For most of us, a house is the biggest purchase we’ll ever make. It’s a cherished and crucial part of any family’s life experience. When financial hardships force you to consider filing for bankruptcy, you are right to wonder about the fate of your home.
The good news is California allows many people to hang on to their homes through bankruptcy, but you’ll still need to keep up with your mortgage payments.
Does Bankruptcy Clear Mortgage Debt?
When filing for Chapter 7 or Chapter 13 Bankruptcy, you work toward getting a court-granted reduction on your debt or a discharge of debt. A discharge gets rid of many of your credit card bills and other unsecured debt. Bankruptcy doesn’t usually erase “secured debt” such as a car loan or a mortgage on a house.
So, whatever you owe on your house will likely be your burden if you still want to maintain your residence after your bankruptcy is over. Luckily, several bankruptcy protections can prove beneficial for those with mortgages.
Chapter 7 Bankruptcy and Mortgages
“Secured debt” is debt that’s secured by collateral. So, when you buy a house or a vehicle, you get a loan that’s protected by the house or car you’ve purchased. The home and car are the collateral. It means the bank has the right to foreclose on your car or house and take them back if you fall into arrears.
Surrendering Your Home After Chapter 7 Bankruptcy
When filing Chapter 7 Bankruptcy you can decide to surrender your home, and in most cases, you are no longer obligated to pay off your mortgage. Your lender is allowed to sell the home and you would be clear of the mortgage.
It’s much like foreclosure, but under Chapter 7 protection you can’t be sued by the lender to recover the difference between what your house is worth when compared to your loan. Your remaining loan balance may be more than the current market value of the property, but you aren’t held responsible for the difference.
Keeping Your Home After a Chapter 7 Bankruptcy
If you want to stay in the home, you are usually permitted to maintain ownership through your bankruptcy exemptions, provided you continue to keep up with payments. To ensure that you maintain ownership of your home, you must be up to date on mortgage payments before filing for Chapter 7 Bankruptcy.
Having trouble with those mortgage payments? Bankruptcy can also help by delaying the foreclosure on your home. An “automatic stay” is granted during the Chapter 7 process, and this can prevent creditors and banks from collecting on debts until the bankruptcy is complete. In the meantime, you could come to some sort of agreement that allows you to keep your property.
Chapter 13 Bankruptcy and Mortgages
Chapter 13 filers work with their bankruptcy attorney to present a three to five-year payment plan to pay off a percentage of your debts. Filers can usually keep their homes as long as they can keep up with the payments and make up for any missed payments.
At the end of the three to five-year payment plan, Chapter 13 filers earn a discharge on some debt. At this time, the house loan is forgiven. The discharge clears you of the debt and also prevents the bank from coming after you if the home sells for less than the amount remaining on the loan.
However, since it’s a secured debt, you don’t maintain possession of the home unless you continue to pay towards your mortgage.
Reaffirming a Mortgage in Chapter 13 Bankruptcy
In some cases, you might consider reaffirming your home loan under a Chapter 13 Bankruptcy plan. This would mean you’d give up the option to walk away from your home and the debt in a discharge.
Reaffirmation can keep a home in your possession, and you might even earn a new loan agreement with lower interest rates and a reduced total balance.
The dangers of reaffirmation lie in the length of time you may be under your loan when you give up your Chapter 13 discharge options. You can’t file for bankruptcy again for some time, and in the meantime, you’ll be unable to avoid foreclosure. This is risky because you could get held liable for the difference in the home’s sale price and what you owe.
When Can I file for Chapter 7 Again?
Since Chapter 7 Bankruptcy wipes bills clean when you receive a discharge of debt, you are required to wait 8 years before you can use this financial reset option again. That’s why reaffirming a mortgage can be a risk. You can’t count on bankruptcy protection if you fall behind on payments and face foreclosure for at least several years.
If you previously received a Chapter 13 discharge you’ll have to wait six years from the filing date to then file for Chapter 7 Bankruptcy. Paying off a Chapter 13 payment plan early can shorten this wait time in some cases.
When Can I File for Chapter 13 Again?
After earning a Chapter 7 Bankruptcy discharge, you would usually need to wait 4 years to file for Chapter 13 Bankruptcy. You can file beforehand, but you wouldn’t enjoy all of the benefits Chapter 13 provides.
If you file for Chapter 13 Bankruptcy before the four years are up, the discharge of some debt isn’t allowed in the process. However, some benefits are gained from filing early, depending on your financial situation. Filing for Chapter 13 Bankruptcy right after a Chapter 7 Bankruptcy is known informally as a “Chapter 20” Bankruptcy.
This strategy might allow you to enjoy the debt forgiveness in the Chapter 7 process but use the Chapter 13 payment plan to pay off other debts that weren’t discharged.
If you’ve already received a discharge in a Chapter 13 Bankruptcy case, your next attempt at filing Chapter 13 will have to wait two years from the filing date of the last one. Because the Chapter 13 process usually involves a three to five-year plan to repay debts, you will likely have to wait until your first payment schedule has been completed to the satisfaction of the bankruptcy court.
The Protections of California’s Homestead Exemption
The reason most people are able to maintain their residences through bankruptcy is due to California’s “Homestead Exemption.” This state law was revised in 2021 to offer more protection to bankruptcy filers. It allows you to exempt your home from bankruptcy liquidation as long as the home value meets certain criteria.
The Homestead Exemption in California now sits at somewhere between $300,000 to $600,000. The amount depends on your county’s prior year’s median sale price for a single-family home. Inflation will change these guidelines every few years.
Provided your equity in a home remains under the amount above that applies to your house, your creditors can’t sell your home out from under you. This exemption has been granted to allow those going through bankruptcy a better chance at repaying their loans without worry about where they’ll live. It also allows you to protect any equity you’ve built up in your home.
This homestead exemption is different from the normal bankruptcy exemption filers are granted. The normal exemptions allow you to keep a vehicle, heirlooms, and other personal items as long as you don’t exceed the exemption total for what you’re allowed.
Again, it should be noted, the exemption law can’t protect you if you aren’t able to continue making your mortgage payments. If you can’t, it may make more sense to surrender your home during bankruptcy and let the bank sell it to cover your arrears in mortgage payments.
Your Mortgage and Filing Bankruptcy When Married
When you are married but filing for bankruptcy alone, you need to be careful about how your discharge of debt and particularly a mortgage will affect your spouse.
You may seek to absolve your mortgage debt on the family home through bankruptcy. However, just because you are cleared of making payments, it doesn’t mean your spouse will be. You might surrender your home without penalty, but your partner could remain responsible for repaying some of the debt. This could apply if the mortgage balance is higher than the house’s current resale value.
California is a community property state (as opposed to a common-law state). This means spouses jointly own most possessions obtained during the marriage. Even property with just one name on the title is considered joint property.
These are complex legal issues that are too important to your entire family to leave to chance. It’s a smart idea to work with a bankruptcy law expert when considering bankruptcy alone or as a couple.
Contact a Bankruptcy Attorney Serving Los Angeles and Southern California
Getting out from under crushing debt concerns is key for finding peace of mind. Yet, losing your home during bankruptcy can make a difficult period in your life almost unbearable. Your home is a place of protection and comfort for your whole family. No family should be deprived of such basic needs as having a roof over their heads and a safe place to sleep.
To make sure you are on the fastest road to financial recovery, while also keeping the keys to your home, trust a bankruptcy attorney serving Los Angeles and Southern California. Elena Steers founded the Law Offices of Steers & Associates to extend a lifeline to people who feel imprisoned by their money issues.
Elena Steers has worked on both sides of the bankruptcy process in California and uses her inside knowledge to help people from all walks of life navigate the complexities of a bankruptcy filing. She makes sure her clients are prepared for each step of the bankruptcy journey and that their most important assets are protected. Take a moment and read about her extensive bankruptcy experience.
For expert help in determining how to get the most benefit out of your bankruptcy please contact us today.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.