This is a common question among debtors who either don't own their
home, or are still making mortgage payments. Some homeowners worry about
what will happen to their house when they file
chapter 7 bankruptcy. It helps to understand your options prior to filing based on your unique
situation. In most cases, debtors end up keeping their home when they
file, while meeting necessary requirements in order to do so.
One of the most important aspects in understanding how your home can be
protected in bankruptcy includes knowing the amount of equity in your
home and how to protect it. If you are making mortgage payments on your
home you may have an amount of equity that is considered exempt. Meaning,
a creditor couldn't use this amount to satisfy outstanding debt owed. A
homestead exemption allows homeowners to protect equity in their home from creditors. Each
state has a specific level or amount in which protection is offered to debtors.
The exemption is at the state level, but at the federal level, additional
protection may be available. In some cases, you may qualify to utilize
one or both exemptions depending on whether your state will allow it.
For instance, if your state offers home equity protection up to a certain
amount, a federal exemption (or wildcard exemption) may be applied to
help protect any equity remaining. There are also exemptions for other
items such as household goods, jewelry, retirement accounts, vehicles,
and other personal assets.