This is one of the most pressing questions for people who are struggling under debt. Our homes are personal, emotional, and sensitive parts of our family and who we are.
The answer, like all legal affairs, is complicated and starts with "Maybe, it depends." Very unsatisfying, I know, and that's why talking to a good bankruptcy attorney is so important.
But here are some basic guidelines:
What is your mortgage status?
If your mortgage is current, then your mortgage company is happy and they won't press foreclosure.
However, if you are behind, you will need to renegotiate your mortgage, either by agreeing to higher payments to catch up or by modifying the loan terms such as extending the loan term. Bankruptcy can help a great deal here by wiping out your unsecured debt such as credit cards, medical bills, and personal loans, freeing up income to put into your mortgage. The bank will need to agree to these terms, but it's often in their interest to stay out of foreclosure. However, it's important to note that you will still be responsible for your mortgage and the bank can still foreclose on you post-bankruptcy if you can't keep up with mortgage payments.
A distinction is second mortgages, which can be cleared in bankruptcy if the home value drops below the first mortgage balance. For instance, if you still owe $400,000 on your first mortgage but the home value has dropped to $350,000, a bankruptcy judge could rule that any additional mortgages are now unsecured and can be discharged.
Have you made a homestead declaration?
Based on Massachusetts law, up to $500,000 of home equity is exempted from debt collection IF you have declared a homestead for the house you live in (or up to $1,000,000 if both residents are over the age of 62 or disabled). Otherwise, the exemption is only $125,000. If your home equity is LESS than the exemption amount, then your home can't be sold off in bankruptcy to pay back creditors.
However, if you have greater home equity than the exemption amount, your home can be sold and the additional amount paid to your unsecured creditors. For instance, if you have $300,000 in home equity but have NOT declared a homestead, your house would be sold by the bankruptcy trustee and you would receive $125,000 as your property exemption while your creditors would be paid $175,000.
Remember that regardless, you are still responsible for the original mortgage, which is secured debt that cannot be discharged in bankruptcy. But the property exemption and homestead declaration allow you to keep your home equity protected against the claims of unsecured collectors.
What about the "automatic stay"? Doesn't that mean I get to keep my home?
Yes, but only temporarily. An automatic stay is usually granted when you file for bankruptcy and will stop all foreclosure proceedings and debt collections. But it only lasts for as long as the bankruptcy proceedings, which may be just a couple of months. Afterwards, you will still be responsible for any remaining secured debt that you owe such as the original mortgage.
So what does this all mean?
- Your original mortgage is secured by your home and cannot be discharged in bankruptcy
- Declaring a homestead dramatically increases the protection for your home against unsecured creditors (like credit card collections). Do this early, as the homestead is not protected against debt that predates your declaration!
- The primary benefit of bankruptcy is to clear your unsecured debt so that your cash flow can now cover your family's living expenses and remaining debt obligations. If your income is too low to afford mortgage payments + living expenses, excluding other debt payments, then it will be difficult to avoid foreclosure.
Bankruptcy is more common than you may think and a real option for getting a fresh start. Talk to bankruptcy attorney- they will be able to give you formal legal advice on the best way to keep your home intact and reorganize your finances.
(Source: Flickr via Infrogmation)