Keeping Your Home While Filing Bankruptcy

By: Lance T. Denha, Esq.

Many debtors who consider the filing of a bankruptcy also worry about possibly losing their primary residence. Put another way, the “primary residence” is not a vacation home or investment home, but the home where they would like to continue to raise their children. Whether or not this will actually happen depends on a few different things. For example, are the mortgage payments current? If the payments to the bank are still up to date it is more likely you will be able to keep your house. However, if you have fallen behind on the mortgage payments, the results may differ under Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 bankruptcy is available to those debtors who qualify under certain income guidelines set by state laws. A debtor’s income must be equal to or below the median income in the state in order to avoid further tests associated with a Chapter 7 bankruptcy which is referred to as the mean test. For example, the median income in the state of Michigan for a family household of four is $74,558.00.  This means that if a household is under this median income, that particular debtor may have an absolute right to file for Chapter 7 bankruptcy protection. A Chapter 7 bankruptcy is also known as a “liquidation” bankruptcy because it wipes out debt that is permitted to be erased under this type of bankruptcy.

Chapter 13 bankruptcy like its predecessor also has some eligibility requirements. Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy reorganizes and uses a debtor’s income to pay creditors the money owed over time under the bankruptcy plan. If a debtor’s income is too low, or if it is not a regular recurring stream of income, then the debtor may not be able to make payments according to the schedule set by the court and will not be eligible for Chapter 13 bankruptcy.

Under the bankruptcy code, which is federal law, certain exemptions allow you to keep property away from the creditors reach. The Bankruptcy Code lists property debtors are able to exempt (i.e. keep such property and remove from bankruptcy estate). Debtors are now able to exempt up to $21,625.00 in equity in a home which is used as a residence under federal laws of the bankruptcy code. Also under the laws of Michigan, debtors are able to choose either the exemptions listed under the laws of Michigan or the exemptions listed under the federal law guideline. Debtors can choose the Michigan exemptions and exempt up to $30,000.00 of equity in the home, or $45,000.00 in equity if the debtor is 65 years or older.

In addition, Michigan provides further protection if debtors are married and own the property jointly as tenants by the entirety, whereby Michigan law would allow debtors to be able to fully protect all of the equity associated with their primary residence unless the debts are jointly held with the other spouse. In the scenario of joint debts with married spouses, such debts would not be free from the creditor’s reach.

Bankruptcy will help eliminate the debtor’s personal liability however it does not affect the lien on the property. Thus after a bankruptcy the mortgage lender still has rights associated with the property, which includes the right to foreclose if the debtor/borrower remains in default with the terms of the mortgage agreement.

Keep in mind if the debtor does not remain current on the loan, the trustee overseeing the bankruptcy case as well as the mortgage lender may not allow such debtor to continue to make the mortgage payments. As a result a foreclosure action may ensue by the lender as a result of the defaulting mortgagor. Therefore it is highly advisable to continue to make payments so that the debtor is able to show the court that you are able to stay current and continue to make payments on your mortgage.

Always remember to be prepared and have an in depth understanding of the benefits as well as the potential repercussion associated with bankruptcy protection and your primary residence incorporated within the bankruptcy.