Will You Lose Your House If You File For Bankruptcy?

One of the most frequent questions asked of me by those contemplating a bankruptcy filing is, "Will I lose my house if I file for bankruptcy?" Although the answer is generally "No", the question cannot be answered properly until the potential client provides some details about their financial situation. The two biggest considerations are whether the debtor is current with their mortgage payments and how much equity they have built up in their home.

Not surprisingly, a debtor can lose a home if they fail to make regular mortgage payments. In a Chapter 7 proceeding, a debtor who falls behind in mortgage payments before or after the bankruptcy case is filed is at risk of losing the home. For this reason, I will not file a Chapter 7 bankruptcy petition on behalf of any client who has expressed a desire to keep their house if they are not current with their mortgage payments. The client must become current with their mortgage (or have entered into an enforceable loan modification agreement with their lender that addresses the missed payments) before filing, or if that is not possible, the client must file for debt relief under Chapter 13.

In a Chapter 13 proceeding, a debtor who misses mortgage payments before the case is filed can avoid losing the home if they pay back the arrearage through the Chapter 13 plan, but the debtor will risk losing the home if any regular mortgage payment or Chapter 13 plan payment that comes due after the case is filed is not paid. For this reason, it is very important for a debtor to make all regular mortgage payments and plan payments after a Chapter 13 bankruptcy proceeding is commenced.

In a Chapter 7 proceeding, there is the additional consideration of the amount of equity a debtor has built up in their house in determining whether or not the debtor will keep their house. Equity is the difference between the value of the house and the amount of debt secured by the house (usually in the form of a mortgage). If the debtor has too much equity built up in their house, they are at risk of losing their home. A Chapter 7 trustee will sell, or liquidate, all property having value over and above the total amount of all secured creditors' liens and valid exemptions, and distribute to unsecured creditors the net proceeds of the sale remaining after payment of the secured creditor liens, exemptions and transactional expenses. Fortunately, in Massachusetts the exemption available for a primary residence is significant, up to $500,000.00 per household. In Connecticut, the exemption is more modest at $75,000.00 per individual, or $150,000.00 per couple. Exemption analysis can be complicated and you should not proceed with a bankruptcy proceeding unless your bankruptcy attorney can confidently demonstrate to you that your home equity will be protected by a valid exemption.

In conclusion, most people will not lose their house if they file for bankruptcy, provided they are current with their mortgage payments, and remain so after filing, and have not accumulated too much home equity.

Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com