I have touched upon this issue a few times before on this blog, but I feel, given the number of questions I receive from potential clients on this topic, that it is worth going into again here. It is, in short, possible to keep your home if that is your desire in a number of ways through a Chapter 7 bankruptcy. However, there is no inherent right to keep real property through a Chapter 7. That is to say, if you want to keep your home and file for Chapter 7 bankruptcy, you must take certain steps to ensure that this outcome is likely.
There are a few specific circumstances under which a home may be retained through a Chapter 7:
First, if you own your home outright, it may certainly be retained through the bankruptcy provided there are enough exemptions available to exempt your equity from the bankruptcy estate so that the court-appointed trustee overseeing your bankruptcy process cannot liquidate it (i.e., sell the home off) for the benefit of creditors whose debts are otherwise being discharged by the bankruptcy. Here in my area of southeast Michigan and in the Detroit area in particular, there are few issues arising from this set of circumstances: while the homestead exemption providing for the exemption of real estate that is the debtor’s primary residence is not stellar, it is often sufficient to cover many of the older homes in my area.
Second and more problematically, if you are paying on a mortgage or land contract and are not in any arrears on your payments, the home may be retained in a couple of ways. One, the debt may be “reaffirmed” with the loan lender. “Reaffirmation” means that you are agreeing to continue paying on the original note of sale for the home (or a revised version of it) after the bankruptcy discharge is granted even though that particular debt would otherwise have been discharged in the bankruptcy. Most lenders will agree to sign such an agreement, provided that you are not behind in your payments. However, if you are behind in your payments or EVER fall behind in your payments, the lender generally retains the original contractual right to foreclose. If that happens after your discharge is received, you will remain liable for the amount owed under the original note of sale and/or any applicable deficiency judgments. As a result, signing a reaffirmation agreement is extremely tricky and is something that I, personally, will agree to only under very favorable circumstances to my clients. I would highly recommend consulting a knowledgeable bankruptcy attorney before signing any such agreement.
Third, if you are paying on a mortgage or land contract and, again, are not in any arrears on your payments, you may, depending on your state’s laws, opt to retain the home and continue making payments on it without signing a reaffirmation agreement. The viability of this option will vary from state to state. Here in Michigan, it is a viable option so long as you remain current on your payments—forever. Home mortgage lenders cannot foreclose on your home and evict you if you are current on your payments. Some lenders, however, will stop sending monthly payment statements, etc., after a bankruptcy if you have elected this option. Again, consulting a knowledgeable bankruptcy attorney before making such a decision is a must.
The bottom line is that, if you want to retain your home through a Chapter 7 liquidation, you must be current on your payments at the time of the bankruptcy filing, through the bankruptcy process, and beyond the bankruptcy discharge. Otherwise, there is a likelihood that the automatic stay will be lifted with regard to that property and foreclosure proceedings initiated before the bankruptcy is even complete.
If you have questions regarding bankruptcy and your real or personal property, please contact me to schedule a free, initial consultation.
