There are many myths associated with bankruptcy. One of the most enduring this is that if you file for bankruptcy, you will lose your home.
The reality is much more complex than this. It is possible to lose your property through bankruptcy, but most of the time this does not occur. According to FindLaw, whether or not you will lose your home depends on the type of bankruptcy you file and the amount of equity in your home.
How does the type of bankruptcy matter?
The majority of private individuals file either a Chapter 7 or Chapter 13 bankruptcy. The Chapter 7 bankruptcy is a “liquidation” bankruptcy, which means that the courts will liquidate your property to a certain extent to pay off the debt. If you are filing a Chapter 7 bankruptcy, there is a possibility that you will lose your home.
A Chapter 13 bankruptcy is a “reorganization” bankruptcy. If you file a Chapter 13 bankruptcy, there is no risk of losing your home because you are simply reorganizing your debt.
How does equity matter?
If you file a Chapter 7 bankruptcy, whether or not you keep your home depends on the amount of equity you have in the property. Equity is the difference between the current market value of the property and the amount in mortgages or home equity loans.
In the majority of cases, persons filing a Chapter 7 bankruptcy negative equity in their property. If a debtor has negative equity in his or her home, the debtor can keep the property so long as they can keep paying the mortgage. Otherwise, the courts will liquidate the property.