If you are considering or going through bankruptcy, it is important to separate the truth from fiction. There are many rumors associated with bankruptcy, particularly Chapter 7 bankruptcy.
Chapter 7 bankruptcy is the most common variety of personal bankruptcy filed in the United States. Since Chapter 7 bankruptcy involves liquidating your assets, you may worry that you will lose your home if you file. However, according to FindLaw, in many cases you can keep your home after a Chapter 7 bankruptcy if your property has negative equity.
Why would creditors take my home as part of a Chapter 7 bankruptcy?
When it comes to personal bankruptcy, the most commonly filed Chapters are 7 and 13. Typically, if you have an income below a certain threshold, you will file for Chapter 7. Part of the process of a Chapter 7 bankruptcy involves going through your assets and seeing what you can sell off, or “liquidate,” to pay back your creditors as much as possible.
One of your biggest assets is your home. In certain circumstances, the courts may require you to liquidate your home to pay back your creditors. However, if your equity is negative the courts will find your home exempt from liquidation.
What is “negative equity?”
Equity is what you get when you take the current market value of a property and subtract the amount of the mortgage you have on the property. In the majority of cases, persons filing Chapter 7 bankruptcy have negative equity. This means that many people get to keep their homes.
However, in certain circumstances it may be beneficial for you to “walk away” from the mortgage, particularly if you cannot pay it. Filing bankruptcy is one of the few times you can do this with no further legal repercussions.