Should I File for Chapter 7 or Chapter 13 If I Want to Keep My Home?

Choosing between Chapter 7 and Chapter 13 bankruptcy depends on your financial situation and specific goals, including whether you want to keep your home. Each type of bankruptcy offers different benefits and consequences regarding property and debts.

Here’s a breakdown of both options to help you decide which might be better suited for you if your goal is to keep your home:

Chapter 7 Bankruptcy:

• Liquidation bankruptcy: Chapter 7 is primarily a liquidation bankruptcy, where non-exempt assets may be sold to pay off creditors. It’s typically the faster of the two types of bankruptcy, often completing in about 3 to 6 months.
• Eligibility: You must pass the means test to qualify for Chapter 7, which ensures your income is low enough to file for this type of bankruptcy.
• How It Affects Your Home:
  • Exemption: In Chapter 7, you can keep your home if you are current on your mortgage payments and if your home is exempt under your state’s homestead exemption laws.
  • If your home has equity (the value of the home exceeds the amount owed on the mortgage), the bankruptcy trustee may sell it to pay creditors, unless the home equity is protected by the homestead exemption.
  • If you’re behind on mortgage payments, the lender may still proceed with foreclosure unless you catch up on payments through other means.
• Debt Discharge: Chapter 7 eliminates most unsecured debts like credit cards, medical bills, and personal loans. However, it does not discharge secured debts like mortgages or car loans, so you must continue making payments on your home if you want to keep it.

Chapter 13 Bankruptcy:

• Reorganization bankruptcy: Chapter 13 involves reorganizing your debt and setting up a repayment plan to pay back a portion of your debt over 3 to 5 years, based on your income, assets, and debt.
• Eligibility: You must have a regular income and your unsecured debts must be less than $419,275, and secured debts must be less than $1,257,850 (as of 2023).
• How It Affects Your Home:
  • Foreclosure Protection: Chapter 13 stops foreclosure proceedings and gives you an opportunity to catch up on past-due mortgage payments over time. You can keep your home if you can make the mortgage payments and any arrears as part of your repayment plan.
  • Retention of Property: You can usually keep your home even if you’re behind on payments, as long as you can afford to repay the arrears over the life of the repayment plan.
  • Revised Repayment Terms: If you owe a significant amount on your mortgage or other secured debts, you may be able to reduce the overall debt through the plan, although this can vary based on your specific situation.
  • Debt Discharge: At the end of the plan, any remaining unsecured debt that has not been repaid is discharged.

When to Choose Chapter 7:

• You are current on your mortgage payments and don’t have a significant amount of home equity.
• You are looking to eliminate unsecured debts quickly and start fresh, while being able to keep your home.
• You don’t have significant assets to protect and don’t mind the potential risks of liquidation if there’s home equity that isn’t fully protected by the homestead exemption.
• You don’t mind losing your home if it’s at risk due to unpaid mortgage arrears or foreclosure.

When to Choose Chapter 13:

• You are behind on mortgage payments and want to avoid foreclosure. Chapter 13 gives you a chance to catch up on missed payments over a 3-5 year period, making it a good option for those at risk of losing their home.
• You have significant home equity that would not be protected by Chapter 7 exemptions, or if you own other valuable assets you want to keep.
• You want to restructure your debts, including mortgage arrears, and create a manageable repayment plan that allows you to retain your property.
• You have regular income and can afford a structured payment plan over time.

Key Takeaways:

• If keeping your home is a primary concern and you’re behind on your mortgage, Chapter 13 is generally the better option, as it allows you to reorganize your debts and catch up on overdue payments while preventing foreclosure.
• If you’re current on your mortgage and have minimal home equity or don’t mind potentially losing your home (due to non-exempt equity), Chapter 7 may be an option to quickly discharge unsecured debts and keep your home.

However, the best choice depends on the specifics of your financial situation, such as the amount of mortgage arrears, home equity, income, and other debts. Consulting with a bankruptcy attorney can help you evaluate your situation and determine the most appropriate course of action based on your goals of keeping your home.

Carefully consider the advantages and disadvantages given above before discussing your bankruptcy with an attorney.  For more email the firm at [email protected] or call 480-744-7711.