For most people, their homes are the single largest assets they own and filing for bankruptcy can be a daunting proposition because many people have fears that filing for Chapter 7 or Chapter 13 bankruptcy will automatically mean they lose their homes. The truth is that most people are able to keep their house in bankruptcy, but the protection is never automatic so people will want to be sure they are working with an experienced Arizona bankruptcy attorney.
Keeping a home in bankruptcy usually depends on three things: the type of bankruptcy a person is filing, how up-to-date a person is on their mortgage payments, and how much equity a person has in their home. Chapter 13 bankruptcy generally lets people keep their homes even if they are behind on mortgage payments, and people filing for Chapter 7 can have many debts discharged so mortgage payments become more affordable.
Keeping a House in Bankruptcy
The first thing people need to understand about bankruptcy filings is that as soon as a person files a bankruptcy case, it will create an automatic stay that prohibits all creditors from taking further collection actions. This is especially important for people who are facing foreclosure because an automatic stay will halt that process.
Arizona Revised Statute § 33-1101 establishes the state homestead exemption, and any person 18 years of age or older who resides in Arizona can hold as a homestead exempt from execution and forced sale, not exceeding $250,000 in value, any one of the following:
- Interest in real property in one compact body on which exists a dwelling house in which the person resides
- Interest in one condominium or cooperative in which the person resides
- A mobile home in which the person resides
- A mobile home in which the person resides plus the land on which that mobile home is located
Only one homestead exemption can be held by a married couple or a single person, so the value specified in this section refers to the total equity of either a single person or married couple. Even when a married couple is divorced, the total exemption allowed for their residence cannot exceed $250,000.
Home equity is determined by subtracting the amount owed on a home from the market value of the house. If a person’s home has a market value of $200,000 but they still owe $100,000, they would have $100,000 in equity.
Houses in Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy case, a court may consider what a person has in equity, after an exemption, to pay off their debts. If the equity after an exemption is not much, the person is likely allowed to keep their house since a sale would not create much money.
A person may not even need an exemption if they owe more on their house than it is worth. When people have lots of equity in their homes, a bankruptcy court could determine the person needs to sell the home to pay off creditors.
The general idea of Chapter 7 is to liquidate all of a person’s unsecured debts, and doing this should allow a person to be able to make their mortgage payments. When a person still cannot afford their mortgage payments after filing for Chapter 7, then they will be at greater risk of losing their home.
People who know they are going to file for bankruptcy and want to keep their house can see if their mortgage lenders will work with them on modifying their mortgage agreements in such a way that allows them to catch up on their payments. People must so this before filing for bankruptcy because as soon as they file, a court will take over the assets and they will lose the ability to make these agreements.
People can give themselves the best chance of keeping their homes in Chapter 7 cases by keeping up to date on their mortgage payments, getting as much equity as possible protected through an exemption, owing more on a house than it is worth, demonstrating to the court that a person can make mortgage payments on time, and negotiating with lenders before filing for loan modifications.
Houses in Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, the equity in a home will also be a factor and figures into the amount a person has available to pay their unsecured creditors. A court will essentially add up all of a person’s assets and decide how much goes to pay unsecured debt, with a homestead exemption lowering the amount of equity a person has and the court only considering the equity after an exemption is subtracted.
Chapter 13 is basically designed to let people keep their homes when filing for bankruptcy. In many cases, mortgage payments are worked into repayment plans.
A Chapter 13 repayment plan should allow a person who is behind on mortgage payments to formulate a plan that works out how they will pay the past due payments over the three to five years of their repayment plan. A person may still need to make current monthly payments.
The catch to filing for Chapter 13 is that people must finish their repayment plans to get their unsecured debts discharged, and people who fail to complete their plans will have their cases dismissed and find themselves right back where they started.
A study by the Florida International University College of Law found that the overall discharge rate for debtors in the seven districts covered by the Chapter 13 Project was 33 percent, with 67 percent of cases being dismissed or converted, 23 percent before confirmation and 44 percent after confirmation. As a percentage of cases with a confirmed plan, the discharge rate was nearly 43 percent.
Contact Our Arizona Bankruptcy Law Firm
Are you thinking about filing for Chapter 7 or Chapter 13 bankruptcy in Arizona, but have major concerns about your ability to keep your home? Make sure that you are working with DebtBusters because we understand how important houses are to our clients and we know how to find ways for people to stay in their homes while still being able to obtain all of the benefits of filing for bankruptcy.
Our firm offers a no-money-down plan under which we can set up a convenient payment plan for you. Call (866) 223-4395 or contact us online to receive a free consultation with our Arizona bankruptcy law firm.