Can I Keep My House in Chapter 7 Bankruptcy? Yes—If You Can.
Keep My House in Chapter 7 Bankruptcy: Creditors vs. the Chapter Trustee
Generally, you should not worry that you will lose your home if you file for Chapter 7 Bankruptcy. However, there are two specific circumstances in which keeping your house through a Chapter 7 bankruptcy in Michigan may be difficult: (1) You are behind on your mortgage payments and (2) You have more equity in the home than can be protected in the Chapter 7. In other words, there are 2 adversaries that you need to worry about with regard to keeping your home in Chapter 7: the bank (or trust) holding your mortgage and the Chapter 7 Trustee. Before we explore each of these in turn, however, let's look briefly at how Chapter 7 bankruptcy affects your debts in general and how it interacts with Michigan state law with regard to real estate.
Keep My House in Chapter 7 Bankruptcy: Your Mortgage Obligation and the Chapter 7 Discharge
The first thing to understand with regard to keeping your home through a Chapter 7 bankrutpcy in Michigan is that the legal framework of the process is governed by 2 separate "layers" of law: (1) Michigan state law governing mortgage obligations and the foreclosure process and (2) Federal law under the US Bankruptcy Code. First, under Michigan law, in or out of bankruptcy, you cannot be foreclosed upon if you are not delinquent in your mortgage obligations. Thus, this is the easiest answer to this entire question: if you are current on your payments (and do not have more equity in the home than can be protected: see below), you will not lose your home to foreclosure. Period. Regardless of whether you file for Chapter 7 bankruptcy or not. It is also true that a Chapter 7 bankruptcy, of course, is one of the best, safest ways to surrender real estate that you do want to walk away from without the fear of deficiency debt liability to the mortgage-holding bank or taxable liability to the IRS that may come by way of a foreclosure "walk away" or short sale. But this article is concerned, primarily, with the question of keeping a home in Chapter 7 bankruptcy rather than the surrender of a home. However, there is an effect upon your mortgage obligation by a Chapter 7 bankruptcy, even if you are current and want to keep your house. A Chapter 7 bankruptcy is a so-called "liquidation" bankruptcy in which, except for a couple of different types of debt declared to be non-dischargeable by the Bankruptcy Code, such as child-support or recent tax debt, all of your debts will be discharged in full, requiring you to pay nothing toward them. ALL of your debts. Including "secured" debts such as home mortgage loans. Thus, whether you want it or not, a Chapter 7 bankruptcy will discharge your obligation to continue making mortgage payments unless you sign something called a "reaffirmation agreement" with your mortgage creditor, which is generally a very bad idea for reasons explained below. This does not mean that you lose your home, however. It only means that, after the Chapter 7 is over—even years after it is over—you will have the freedom, if you decide that you no longer can afford to maintain the home, to simply stop making payments and to walk away from the property without worrying about a deficiency debt lawsuit or taxable liability. Unless you sign a reaffirmation agreement "reaffirming" the mortgage in your bankruptcy—which is why such agreements for mortgages are such a a bad idea. As noted above, you cannot be foreclosed upon under Michigan law if you are current on your payments. Nothing in Michigan or Federal Bankruptcy law forbids you from voluntarily repaying a debt after bankruptcy has discharged it. Thus, after a Chapter 7 bankruptcy in which you wisely do not "reaffirm" your mortgage debt, you are essentially making your monthly mortgage payments voluntarily. If you make all of the payments you are required to make under your mortgage note contract, Michigan law requires that the mortgage holder release its lien, and you will own the home, free and clear, as if you had never filed for bankruptcy. But, until that happens, after a Chapter 7 bankruptcy, you retain the option to leave if your circumstances further worsen—if you do not sign a reaffirmation agreement, which will put you back on the hook for the entire mortgage debt as if you had never filed for bankruptcy at all. To further clarify, under Michigan law, every "mortgage" actually involves 2 separate legal contractual instruments: (1) the mortgage itself and (2) the mortgage note. The note is where your personal liability comes from. It is the agreement that you sign when you finance a home purchase that requires you to pay $X per month for X number of months or years. It is the mortgage note that a lender sues you under if you are deficient on your payments. The mortgage itself is the other instrument in play. What the mortgage is is the instrument that makes clear that the house you are buying is serving as collateral "securing" the personal mortgage note loan (thus, the transaction makes the note obligation a "secured debt") and giving the bank the right to take its collateral back (i.e., foreclosure) if you default on the terms of the mortgage note loan. Chapter 7 bankruptcy discharges your obligation to pay under the terms of the mortgage note, but it does not affect the bank's rights under the mortgage itself to reclaim its collateral. Thus, the surrender of a home in bankruptcy does not allow you to keep your home for free. But Michigan law still protects you from foreclosure if you keep you payments current before, during, and after bankruptcy. No different than if you had not filed for bankruptcy.
Keep My House in Chapter 7 Bankruptcy: The Value of Your Home and the Chapter 7 Trustee
Keeping your home through a Chapter 7 bankruptcy with regard to your mortgage holder and with regard to foreclosure is no different than it is outside of Chapter 7 bankruptcy: if you are current on your payments, no foreclosure. If you are not current on your payments, you are at the mercy of your mortgage creditor's willingness to negotiate some kind of work-out option the same as you would have been without filing for bankruptcy (except that you now have the right to walk away freely from the home if the negotiation doesn't bear fruit). A Chapter 7 bankruptcy is called a "liquidation" bankruptcy for another reason than that you "liquidate" your debts: you may also have some of your personal assets liquidated in the process by an individual called the Chapter 7 bankruptcy Trustee. The Chapter 7 Trustee is a person assigned to your case by the Bankruptcy Court upon the filing of your bankruptcy petition. His or her job is to liquidate for the benefit of your creditors, who otherwise will receive nothing on the debts owed to them, any of your property that is "unprotected." Your property is "protected" in Chapter 7 bankruptcy if it has been, in the petition prepared for your by your Michigan bankruptcy attorney, "exempted" from the legal "bankruptcy estate" that is automatically created by function of law upon the filing of your bankruptcy petition and which contains everything you own no matter where it is located. The Bankruptcy Code allows certain types of personal property up to certain dollar-value limits to be "exempted" from the "bankruptcy estate." If the property is exempted, it is protected: it is no longer in the estate, and the Chapter 7 Trustee has only the ability to liquidate assets that are in the bankruptcy estate. Most personal property belonging to most Chapter 7 filers can be fully exempted/protected, and, thus, most Chapter 7 bankruptcies do not involve any liquidataion of assets at all. (However, the possibility is a primary reason why you should consult the experienced bankruptcy attorneys of The Hilla Law Firm, PLLC if you are considering bankruptcy and should not attempt to "go it alone!") Your property, naturally, includes your home. There are separate sets of exemptions under both Michigan law and under the Federal Bankruptcy Code. One set of exemptions must be selected in the preparation of your petition at the expense of utilizing the other. However, both sets include a "homestead" exemption designed to allow you to exempt $X amount of equity in your home. If your home, in today's fair-market value terms (whatever that happens to be on the date that you file, now or later) is worth less than you owe in mortgage debt, there is no equity that must be exempted—and thus no worry that you will lose your home to the Chapter 7 Trustee's liquidation power. In Michigan, in this economy, this will include the vast majority of homeowners. However, if you are among the lucky few in this state who actually do have equity in your home that exceeds the value of the homestead exemptions available, you will need, through your bankruptcy attorney, to work out some sort of pay-off to the Chapter 7 Trustee for the value of the non-exempt equity or surrender your house to the Trustee for liquidation. Assume that this will be an additional cost of your Chapter 7, above and beyond what you pay your attorney for his or her fees.
Keep My House in Chapter 7 Bankruptcy: A Chapter 13 Bankruptcy May Be a Better Option
The bottom-line with this question is that, if there is any danger to losing your home to either foreclosure or to Chapter 7 Trustee liquidation, a Chapter 13 bankruptcy may be a better bankruptcy option for you. In a Chapter 13, you can cure mortgage arrearages under a Federal Bankruptcy Court-supervised (and enforced) payment plan over 3-5 years at 0% interest and stop a foreclosure. In a Chapter 13 bankruptcy, no property is liquidated at all (although non-exempt assets can increase the size of your required monthly Chapter 13 plan payment). For most consumers with issues involving real estate, a Chapter 13 bankruptcy is going to be a safer process that will allow you the option for greater advantageous options that are not availabe in Chapter 7, such as stripping off and discharging a second mortgage or home equity line of credit. Michigan bankruptcy Attorney John Hilla and The Hilla Law Firm, PLLC is experienced with both Chapter 7 and Chapter 13 bankruptcies and will guide you toward the right recommendation for your circumstances and your goals. If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.