What Will Happen to Your Home After Filing Bankruptcy?

Share:

Filing for bankruptcy is a difficult decision that is generally only recommended as a last resort. However, if you find yourself in an impossible financial situation, it may be the best path forward. 

If you own a home, you’ll want to understand how the bankruptcy process impacts your home ownership status. While it is possible to lose your home or other valuable assets when filing for bankruptcy, that’s not the only possible outcome.

We’ll walk you through everything you need to know about bankruptcy, the two different types of bankruptcy you can file, and help you understand what will happen to your home or any other property you may own after filing.

Home Filing Bankruptcy

First, what is bankruptcy?

Bankruptcy is a legal process that offers partial or total debt relief if you cannot repay the money you owe to creditors. The process of filing for bankruptcy typically requires a court order.

During the bankruptcy process, your assets may be liquidated. This means that anything you own of value, like your house, your car, and other items, may be turned over to your creditors. However, there are some exceptions, particularly depending on which type of bankruptcy you file.

Filing for bankruptcy is not a decision you should take lightly. While it can help eliminate your debt and allow you to start over again with a clean slate, it also significantly hurts your credit report. A bankruptcy mark on your credit report will lower your credit score, and you may find it difficult to obtain credit for several years after filing.

Depending on the type of bankruptcy you file, it will be removed from your credit report in 7 to 10 years.

What are the different types of bankruptcies?

There are two main types of bankruptcy an individual can file when facing financial challenges: Chapter 7 bankruptcy or Chapter 13 bankruptcy. Both types of bankruptcy can help you eliminate high-interest debt from credit cards — but there are a few differences.

What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is often referred to as straight bankruptcy. This type of bankruptcy will discharge all eligible debts by selling off certain assets and providing the money earned to your creditors. If you still have a balance owed to your creditors after your assets are liquidated, it will be wiped clean. If you own a home, you’ll likely lose your property when filing for Chapter 7 bankruptcy.

Some assets are exempt from this process, such as cars, home essentials, and equipment for your job. And, not all debt can be eliminated. While you’ll be able to get rid of credit card debt, your mortgage, medical bills, and personal or auto loans, you cannot eliminate alimony, child support, taxes owed to the IRS or your state, or student loans.

This type of bankruptcy also stays on your credit report for ten years, which can make it difficult for you to finance other purchases, like a car or home. 

What is Chapter 13 bankruptcy?

Filing Chapter 13 bankruptcy, however, can help you keep your home. The tradeoff is that you’ll agree to repay all or some of your debt — depending on what the court decides. Your lawyer and the court will work out a repayment plan (usually between 3 to 5 years) to repay all debts. At the end of the repayment term, any remaining debt will be eliminated.

Since you’re still paying your debtors, you’re often able to keep some of your assets. This may be a better option if you’re a homeowner who needs debt relief but is worried about losing your home. Just be sure to talk to your lawyer before filing, to make sure you’ll be able to retain your house.

Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy only remains on your credit report for 7 years, reducing the amount of time when you might find it more difficult to obtain credit or financing.

How bankruptcy impacts co-owned homes

If you own a home with someone else and one of you files bankruptcy individually, what will happen to your home depends on the type of bankruptcy you file and the state you live in. If you file for Chapter 13 bankruptcy and agree to a debt repayment plan, you’re more likely to keep your home.

However, if you file for Chapter 7 bankruptcy, you and the co-owner of the home may lose the property depending on your state’s laws. While you, the filer, are likely to be removed as the homeowner.

For example, if your state has common law property rules, that means both you and the co-owner own half of the property individually. In this case, the court won’t be able to take the co-owner’s half of the property and it may be exempt from bankruptcy. However, sometimes the court can sell the entire property (and the co-owner who did not file will receive their legal share of the profits). 

If you live in a state with community property status and you’re married to the co-owner of the home, you’ll likely both lose the property. That’s because it’s seen as a shared “community property” that the court is entitled to take and sell if you file for Chapter 7 bankruptcy.

Can I buy a home in the future after filing for bankruptcy

Yes, but you’ll often have to wait a few years. Some home loans, like FHA loans, let you buy a home as soon as one year after filing for Chapter 13 bankruptcy, provided you meet some requirements. However, if you’ve filed for Chapter 7 bankruptcy, you often need to wait up to two years after your bankruptcy is discharged.

It may be difficult to secure a conventional home loan just after filing for bankruptcy. It’s a good idea to try to wait until you’ve had time to begin rebuilding your credit score before applying for a home loan. You’ll also want to make sure your debt-to-income ratio is low. Both can boost your chances of receiving better terms and a lower interest rate.

The bottom line

Filing for bankruptcy is a huge decision that could end up costing you your home and other valuable assets. However, if your debt is overwhelming, filing for bankruptcy can also help you get back on your feet. We recommend talking to a debt counselor or lawyer to find out if bankruptcy is the right move for you.