In most cases, the answer is yes, you can keep your house after filing for bankruptcy as long as you are able to continue making mortgage payments. Under Colorado law, homeowners are entitled to protect up to $75,000.00 of equity in their home (or $105,000.00 for homeowners who are disabled or over 60 years old). This is often called the ‘homestead exemption,’ and bankruptcy filers can take advantage of this exemption to prevent the sale of their home through bankruptcy.
Keeping your house in Chapter 7 Bankruptcy
When you file a Chapter 7 bankruptcy petition, the bankruptcy court assigns a trustee to administer your case on behalf of your creditors. The trustee’s job is to liquidate any unprotected assets you may own and pay the proceeds to your creditors. This might include your house, but only if you have more equity than your homestead exemption.
Here is an example of how the calculation works:
Let us assume that you file a Chapter 7 bankruptcy, and that your house is worth $200,000.00 with a $150,000.00 mortgage. In that scenario, a bankruptcy trustee will not try to sell your home, because your equity in the home is less that your homestead exemption of $75,000.00.
Here is how the math works: If you were to sell your house for $200,000.00, you should expect to pay about $16,000.00 (8 percent of the sales price) in realtor fees and closing costs. After paying off the mortgage, you would receive $34,000.00 from the sale. This is less than the homestead exemption, so the bankruptcy trustee will leave your house alone.
Consider a different scenario in which your house is worth more: If you could sell the house for $300,000.00, your costs of sale will be $24,000.00, and after paying off the mortgage you would receive $126,000.00 from the sale. In this case, the bankruptcy trustee would sell the house, pay the mortgage and closing costs, pay you $75,000.00, and pay the remaining sales proceeds to your creditors.
Keeping your house in Chapter 13 Bankruptcy
If you are behind on mortgage payments and are facing foreclosure, you might consider filing a Chapter 13 bankruptcy. Chapter 13 allows you to create a repayment plan to catch up your past due mortgage payments over several years, and can be used to prevent foreclosure.
When you file Chapter 13, you propose a payment plan to pay back a portion of your debts. The plan lasts between three and five years, and the payments are often determined by your disposable income. If you will be catching up on past due mortgage payments (also known as ‘arrears’), you will need to include the total amount of arrears in the Chapter 13 plan. You will also be required to start making the regular mortgage payment to the bank going forward.
Chapter 13 can be a useful tool for those who can afford their mortgage payments going forward, but have too many missed payments to be able to catch up.
Another advantage of Chapter 13 is that it allows you to strip off a second mortgage. As long as your property is worth less than the first mortgage, you can file a motion with the bankruptcy court to remove the second mortgage. If the value of your property is in question, you may need to get an appraisal to determine if a second mortgage strip-off is possible. This is a particularly valuable aspect of Chapter 13 since it potentially allows you to gain equity in your property as the real estate market improves.
Removing Judgment Liens in Bankruptcy
If a credit card company or other collector sues you and obtains a judgment against you that creditor will often record the judgment in the county records of the county where you live. When a judgment is recorded in the county records, it attaches as a lien on any real estate you own in that county. This is often referred to as a judgment lien or judicial lien.
The problem with judgment liens is that, like mortgages, they must be paid before you can sell or refinance your house. Fortunately, judgment liens can be removed in both Chapter 7 and Chapter 13 bankruptcies.
It is important to remember that judgment liens are not removed automatically by a bankruptcy filing. Your bankruptcy attorney will need to file a motion with the bankruptcy court for each judgment lien that you want to have removed. If you have previously filed bankruptcy but did not file the necessary motions, you may still have judgment liens attached to your property. If this is the case, you may need to contact our firm to discuss reopening your bankruptcy.
Contact us for a free consultation at (303) 688-0944.