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Keeping your home when you file bankruptcy

If you are like many Illinois homeowners, your home is your biggest asset. Your mortgage payments likely are one of the biggest monthly payments you make. If you have accumulated excessively large credit card balances with large aggregate payments as well, your monthly income may not stretch far enough to cover everything.

Perhaps you are thinking about filing bankruptcy as a way to discharge your debts and get a new financial start in life. If so, you have two basic choices: Chapter 7 and Chapter 13, and they are not the same when it comes to saving your home.

Exemptions

Both Chapter 7 and Chapter 13 bankruptcies have exemptions to which you are entitled. An exemption is a certain amount of property that you can keep during and after your bankruptcy proceeding. Chapter 7 exemptions, however, are much less flexible than those offered by Chapter 13. In addition, they tend to be lower and stricter. Consequently, you stand a better chance of keeping your home in a Chapter 13 bankruptcy.

Home equity

It all comes down to how much equity you have. Equity, as you may already know, is your home’s fair market value less your mortgage balance. In other words, if you have a mortgage, you do not own your home; you own only the dollar amount of your home's value that is not mortgaged.

If you have very little equity, or are in an “upside down” position where your remaining mortgage is more than your home’s fair market value, your home likely will be exempt in a Chapter 7 bankruptcy, and you will not have to sell it or lose it. If your mortgage company starts foreclosure proceedings before you file bankruptcy, you likely can forestall the foreclosure date during your bankruptcy. However, Chapter 7 does not discharge your mortgage debt, and your mortgage company can re-file foreclosure proceedings after your bankruptcy if you do not catch up on the mortgage payments you already owe and continue to make your regular monthly mortgage payments thereafter.

If you have considerable equity in your home, Chapter 13 probably is your best choice. In a Chapter 13 bankruptcy, you have a court-approved plan whereby you pay your existing debts, usually within five years. During this time you must make your court-ordered mortgage payments that include your regular monthly payment amount plus a pro-rated amount to catch up on any payments you missed before filing bankruptcy.

Before you make any decision regarding whether or not you should file bankruptcy, and if so, which kind, you should talk with an experienced bankruptcy attorney. (S)he can answer all your questions about your home mortgage and other debts and give you wise counsel on your best options for saving your home while eliminating most if not all of your consumer debt.

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