What Happens to My House in Bankruptcy?
One of the most common concerns voiced by Nevada homeowners considering bankruptcy is “Will I lose my house if I file for bankruptcy?” For most Nevada residents, the answer is “no.” But, the disposition of a home during or after bankruptcy depends in part on factors outside the bankruptcy process, such as how the house is titled and whether the homeowner is delinquent or already facing foreclosure. The treatment of a house in bankruptcy also depends on whether the homeowner is filing for Chapter 7 or Chapter 13 bankruptcy, and the amount of equity in the property.
Filing Bankruptcy When Mortgage Payments are Current
Chapter 7 Bankruptcy
A homeowner who is current on his or her mortgage payments and files for Chapter 7 bankruptcy protection will generally see no negative consequences regarding a home ownership. In Nevada, the homestead exemption is $136,925. That means that up to $136,925 of a Nevada homeowner’s interest in his or her home is protected from creditors. That protection extends to creditors submitting claims in bankruptcy. So, as long as the debtor has $136,925 or less in equity in the home, the home will be fully exempt. (Note, however, that this exemption applies only to homestead property—additional real estate such as rental property or a vacation home does not enjoy the same protection.)
Even when equity exceeds the exemption cap, the debtor’s home may be protected. For example, if a husband and wife hold real property that is their primary residence as tenants by the entirety, the full value of that property may be protected from the creditors of one spouse if the other spouse is not obligated on the debt.
In addition, if the amount of equity in the home is only slightly higher than the exemption cap it is very likely that the trustee will choose not to liquidate and sell the property because the cost of administration would exceed any value the trustee might be able to extract from the property for the benefit of creditors.
Therefore, as a general rule, the only time a Nevada resident who is current on mortgage payments can expect problems regarding his or her primary residence as a result of filing for Chapter 7 bankruptcy is when there is substantially more equity in the property than can be exempt.
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy case, property is not liquidated by the trustee for the benefit of creditors. Rather, the debtor retains ownership and possession of his or her property while making payments through a Chapter 13 plan. Therefore, a homeowner who is current on mortgage payments when entering a chapter 13 bankruptcy plan can generally expect that he or she will simply be required to continue to make mortgage payments as they come due.
In some cases, chapter 13 debtors may see a surprising advantage in filing for Chapter 13 bankruptcy. Through a process known as “lien stripping,” some homeowners are able to shed second and third mortgages through the Chapter 13 process. This opportunity arises when the primary mortgage debt exceeds the value of the property. In that situation, the second mortgage (and any subsequent mortgage) is effectively unsecured, and the second mortgage debt is treated as an unsecured debt in the bankruptcy case. Although the lien isn’t actually removed from the property until the bankruptcy case is successfully completed, the reclassification of the debt may allow the debtor to discharge some or all of the second mortgage debt.
Delinquent Mortgages in Bankruptcy
Chapter 7 Bankruptcy
Because mortgage debt is secured, Chapter 7 bankruptcy will not directly help to resolve a mortgage delinquency or stop foreclosure. The automatic stay granted when most Chapter 7 bankruptcy cases are filed can forestall the foreclosure process long enough to allow a debtor to resolve the mortgage delinquency in some cases. And, it is possible that discharging unsecured debts, such as credit card bills and medical debt, will allow a debtor struggling with mortgage payments to catch up and stay on track. Ultimately however, the Chapter 7 bankruptcy process itself offers little assistance to a homeowner whose mortgage is seriously delinquent.
In such cases the mortgage holder will typically either make a motion for relief from the stay to proceed with a foreclosure case during the bankruptcy or simply wait for the bankruptcy discharge to be granted and proceed. Nevada does allow limited enforcement of deficiency judgments, so if you are facing foreclosure it is in your best interest to discuss the timing of your bankruptcy petition with your attorney.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy maybe more helpful to a homeowner whose mortgage is delinquent, and not just because of the lien stripping possibility mentioned above. In a Chapter 13 bankruptcy case, the debtor enters into a three to five year repayment plan. As long as payments are kept current under a confirmed Chapter 13 bankruptcy plan, creditors cannot take further collection action on those past due amounts. A homeowner who is delinquent on mortgage debt when entering a Chapter 13 bankruptcy may build past due amounts into the plan and pay them off over a 36 to 60 month period. Of course, the homeowner must also be able to keep current mortgage payments paid as they come due during that time.
Talk to a Local Bankruptcy Attorney
A bankruptcy filing itself won’t typically jeopardize your home except under limited circumstances, such as filing a Chapter 7 case with equity in excess of $136,925. However, that doesn’t mean you should jump into filing without gathering additional information—particularly if you are behind in your mortgage payments or are already facing foreclosure.
An experienced local bankruptcy attorney can help you determine which type of bankruptcy would be most beneficial in your circumstances, and advise you regarding timing of the bankruptcy filing and other variables that may impact the benefits you receive.