Declaring bankruptcy can be a difficult decision, but sometimes it’s the best way to get your finances back on track. However, if you own a home, you may be concerned about what will happen to your equity if you file for bankruptcy. In this article, we’ll take a closer look at bankruptcy and home equity and what you need to know.
What is Home Equity?
Home equity is the difference between the current market value of your home and the outstanding balance on your mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, your equity is $100,000.
What Happens to Your Home Equity in Bankruptcy?
When you file for bankruptcy, you may be required to liquidate some of your assets to pay off your creditors. However, the rules around home equity can vary depending on whether you file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy and Home Equity
In Chapter 7 bankruptcy, your assets are sold to pay off your creditors. However, you may be able to keep your home if your equity is protected by your state’s homestead exemption. The homestead exemption allows you to keep a certain amount of equity in your home, depending on the laws in your state.
For example, if your state’s homestead exemption is $100,000 and your home equity is $150,000, you may be required to sell your home and use the $100,000 to pay off your creditors. However, if your equity is $50,000 or less, you may be able to keep your home.
Chapter 13 Bankruptcy and Home Equity
In Chapter 13 bankruptcy, you create a repayment plan to pay off your creditors over a period of three to five years. Your home equity may be included in your repayment plan, but you may be able to keep your home if you make your payments on time.
If your home equity is higher than the homestead exemption in your state, you may be required to pay a portion of your equity to your creditors. However, this will depend on the specific details of your case and the laws in your state.
What Should You Do?
If you’re considering bankruptcy and you own a home, it’s important to speak with a bankruptcy attorney who can help you understand your options. They can review your situation and help you determine whether you should file for Chapter 7 or Chapter 13 bankruptcy.
They can also help you understand the homestead exemption in your state and how it may impact your home equity. If you’re able to keep your home, they can help you create a repayment plan that will allow you to keep your home and pay off your creditors.
The Bottom Line
Bankruptcy can be a difficult and emotional decision, but it may be necessary to get your finances back on track. If you own a home, it’s important to understand how bankruptcy may impact your home equity and what your options are.
Speak with a bankruptcy attorney who can help you understand the laws in your state and create a plan that works for you. With the right help and guidance, you can get your finances back on track and start building a brighter financial future.