Michael D. Hart, P.C.

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Does declaring bankruptcy put the family home at risk?

| Sep 21, 2020 | Bankruptcy |

Some people file for bankruptcy, hoping that it will eliminate their debt and solve their financial problems. Though states support bankruptcy laws to help citizens recover from a fiscal crisis, the process comes with a cost. Financial counselors will identify assets a person can liquidate to pay off large debts — including real estate.

When determining which assets to liquidate, financial counselors look for instances of “excessive property,” comparing asset value to a person’s financial needs. These evaluations will include a close examination of the family home.

3 factors in determining excessive property

Most people will keep their homes throughout the bankruptcy process, as lawmakers designed bankruptcy to help citizens. Financial counselors will examine three different factors when determining which assets to liquidate:

  1. Bankruptcy type: When filing for bankruptcy, an individual will choose Chapter 7 or Chapter 13. Each entitles a person to different exemptions, meaning that assets less than a specific dollar amount are not eligible for liquidation. Most people will file for Chapter 7, which provides lower, stricter and less flexible exemptions. High-income individuals may file for Chapter 13, which provides higher exemptions and a greater chance to keep important assets.
  2. Home equity: Filing for Chapter 7 does not necessarily mean that the house is at risk. Trustees only consider a home’s equity for liquidation thresholds. Most Chapter 7 filers have low or even negative equity in the house, allowing them to keep the home through a challenging time.
  3. Cost of the mortgage: If a family can keep their home, they must continue to pay the mortgage after bankruptcy. If covering the mortgage is not possible, the bank may foreclose on the home. Some people may consider liquidating the house during bankruptcy to avoid eventual foreclosure, freeing themselves from a considerable financial burden on their way to recovery.

Considering bankruptcy? A lawyer can help explore options

Before filing for bankruptcy, individuals can bring their questions to a local attorney familiar with bankruptcy law. A lawyer will help evaluate the type of bankruptcy best for their client, recommend financial counselors and help protect the family home.