Surrendering or Keeping Your Home in Bankruptcy

When a Chapter 7 bankruptcy is filed, it is sometimes called a liquidation bankruptcy since your property can be liquidated in order to pay your creditors.  When your bankruptcy is filed, a person called a Trustee is appointed to your case and their job is to determine if you have any assets that can be administered in your case.  If so, they will liquidate and distribute the money to your creditors. If not, they your case is considered a no asset Chapter 7 case.  This is why it is important to obtain a local bankruptcy attorney to properly advise you concerning your assets in a potential bankruptcy case.  

Now, you can protect some of your property depending on the type.  For example, when it comes to your home, the Trustee will consider the cost of selling the home (usually at least 10% of the sale price) and the fact that you can protect $15,000 of equity in your home as well ($30,000 if married and filing jointly with your spouse).  The Trustee will do an analysis to consider if, after deducing all liens, mortgages, your $15,000 to $30,000 that you can statutorily protect in Alabama, and any other amounts that can be protected from the total amount likely to be received from a potential sale to determine if it is worth the trouble of liquidating or not. 

Therefore, you would usually have to have a substantial amount of equity in your home for a Trustee to want to liquidate it in your Chapter 7 bankruptcy.  This is why it is always important to retain a local bankruptcy lawyer that knows the local rules and also knows the tendencies of the local Trustees in your particular areas and can counsel you on the potentialities in your Chapter 7 case and inform you on what the Trustee will likely do in your particular case. 

Keeping Your Home

As long as your home does not have a substantial amount of equity and is safe from the Trustee’s attempts at liquidation, then you have several other considerations.  First, if you want to keep your house in a Chapter 7 bankruptcy and avoid foreclosure proceedings then you would need to be current on your mortgage payments or have worked something out with your mortgage company.  You will receive something called an automatic stay of protection from the courts which can allow you to get caught up in a Chapter 7 or to halt a foreclosure sale and cause it to be postponed until a later date. 

However, if you don’t get caught up then when the bankruptcy is through, they will just set it for a foreclosure sale again in most instances.  However, as long as you’re current, or close to it sometimes, then you can just continue to make your monthly payment and keep your house as long as you make your payment.  If you miss payments on your mortgage, then the mortgage company may proceed with foreclosure process like they would normally if you are delinquent on your payments. 

So, in order to keep your house you just need to be current on your mortgage payments and continue to make your payments.  There is something called a reaffirmation agreement that a mortgage company might want you to sign, but it is entirely up to you if you want to or not.  If you do not sign the reaffirmation agreement, and continue to make your monthly payments then you will usually be able to continue with your payments and never have any issues. 

In the event that you do become delinquent on your mortgage and the house falls into foreclosure then when they sell the house the amount the bank gets from the sale will go towards the amount owed on the mortgage.  If the house sells for less than the amount owed on the mortgage, the amount left owed is called a deficiency.  This deficiency is discharged in the Chapter 7 bankruptcy as long as you do not sign a reaffirmation agreement. 

If you do sign the reaffirmation agreement, then you would owe this deficiency should you’re home be foreclosed on in the future after the bankruptcy is over.  If you do not sign this reaffirmation agreement then your monthly payments will not be reported on your credit report as they would if you did sign one.  However, it is usually better not to be saddled with the mortgage debts, in the case of a deficiency, than to have your payments possibly improve your creditor score. 

Surrendering Your Home

Since the bankruptcy discharges your potential mortgage deficiency in the future, then you could basically surrender the home to the mortgage company and let the take the house back and sell it if they want to.  The mortgage company would only be able to get what they could from the sale of the house since they could not come after you for the deficiency, which would allow you to get out from under the mortgage debts and not owe anything on that secured debt.  This is sometimes called “surrendering your home” in the bankruptcy, meaning giving the house back to the bank and not owing anything on it with them just being able to get what they sell it for and the remaining deficiency being discharged. 

Many times, if the bank forecloses on your home and sells the house at a foreclosure sale, they will “forgive” your deficiency eventually if they find that it is not collectible.  When they do this, you will typically have to pay taxes on this forgiven debt since the IRS considers this amount as income.  However, if the debts are forgiven in a Chapter 7 bankruptcy then the discharged debt, unlike the debt forgiven outside of the bankruptcy, is not imputed as income for tax purposes.  This allows a debt to walk away from their home, not owe anything to the mortgage company, and not have to pay any taxes on the debts that were discharged, allowing for a fresh financial start. 

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