Will I lose my house if I file for bankruptcy?

Many people will tell you that if you have a house, you will lose it if you file bankruptcy.  That generally is not true.  When I initially meet with my clients, one of the first things I discuss is the subject of their home.  Together we try to set an approximate value of what the house would be worth in the current market.  We can do that if the client has been keeping up with the sales prices of similar homes in their neighborhood.  Of course, most people don’t keep track of neighborhood sales prices.  In those cases, we can look at the appraisal for tax purposes done by the county auditor.

We then look at the current balances of all the mortgages and other liens on the property.  (A “lien” is a claim on the property for payment of some debt, such as real estate taxes or an unpaid court judgment.)  When we subtract the total balances of the mortgages and liens from the approximate value of the house, the difference is the amount of value you have in your house, which is called the “equity”.  If your house is worth more than you owe on it, you have “positive equity”.  If you owe more than the house is worth, you have “negative equity”.  The next part of our discussion is based upon whether there is positive or negative equity in the house.

If there is positive equity, we next look at how much there is.  In this situation, Ohio law comes into play.  Ohio laws actually protect people from losing everything they have to their creditors by allowing debtors to protect certain values (equity) in certain categories of property.  The amount of equity you are presently allowed to keep, free and clear from the claims of your creditors, is  $132,900.00 per person.  Therefore, if you are married and your house is in both your name and your spouse’s, you have available a total of $265,800 in equity before your creditors or the bankruptcy court would be looking to get any value or money from it.  What this means is that most people filing bankruptcy will be protected from the bankruptcy court having any interest in taking their homes, as they are not going to have a house value of more than $265,800 over and above their mortgage balance.  And even if there were enough unprotected equity for the bankruptcy trustee to make a claim, it could be paid to the trustee in cash rather than turning the house over.

On the other hand, if the balance of your mortage(s) is much higher than the value of the residence, (“negative equity”) we would discuss whether it would be in your best interest to surrender the house in the bankruptcy so that you could get out from under the debt.  If you surrender a house. the mortgage company will have to settle for the amount they get from the sale of the house to a buyer, but cannot go after you if the house brings in less than the mortgage balance.  Of course, in this situation, if you want to stay in the house and pay the mortgage, you can do that as well.

I’ve taken the position in this Blog that you are currently on time with your mortgage payments, or not more than a couple payments behind.  If you are many months behind in your monthly payments, there would be more to discuss.  And your options are different depending upon whether you file a Chapter 7 or a Chapter 13 Bankruptcy.  Those questions will be addressed in my next blog.

About Barbara Horwitz

Barbara Horwitz is an experienced bankruptcy attorney helping people get past financial difficulties. She believes in creating a relationship with clients and is dedicated to making the bankruptcy process as easy and stress-free for clients.

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