One of the first questions asked by Tennesseans contemplating filing a bankruptcy petition is, “What happens to my house?” The answer depends on which chapter the Bankruptcy Code is used to seek relief and on the debtor’s personal financial situation.
If a debtor is seeking total discharge from all debts, Chapter 7 is more likely than Chapter 13 to be used. They must first pass a “means test” to ensure that the debtor’s net worth does not preclude the use of Chapter 7.
If the debtor passes the means test, i.e., qualifies for a Chapter 7 filing, the trustee will take possession of all of the debtor’s assets, including the homestead. The debtor may then choose to exempt a specified portion of the homestead’s value from the claims of creditors. The exemption amount ranges from $5,000 for a single person to $50,000 for a couple with custody of 2 minor children. The trustee will sell the homestead, pay the exempt amount to the debtor and distribute any remaining cash to creditors.
A Chapter 13 proceeding can be used if the debtor has sufficient resources to complete a debt repayment plan and cure any default in mortgage loan payments. All foreclosure proceedings are halted on the filing of the petition.
The debtor must then prepare and submit to the trustee a plan of reorganization, including a provision for resuming mortgage payments. If the plan is approved, and if the debtor is able to cure all defaults in mortgage loan payments, the foreclosure proceeding will be dismissed and the debtor will then be required to continue to make timely loan payments. For persons who want to keep their house after completing a bankruptcy proceeding, Chapter 13 may be the best option.
Deciding which chapter of the Bankruptcy Code will work best depends on many factors, not just the fate of the family home. Consulting a knowledgeable bankruptcy attorney can offer much useful advice in making these complex decisions.
Source: USCourts.gov, “Chapter 13 – Bankruptcy Basics,” accessed on Jan. 28, 2018