In my most recent post, I discussed the importance of income in determining if you qualify for Chapter 7 bankruptcy. In this post, I will discuss the importance of your mortgage in determining if you qualify. I always inquire into a potential client's mortgage situation after asking about income.
If you rent and do not own a home, you can skip this post. However, if you are considering filing a Chapter 7 bankruptcy and you do have a mortgage, read on. The particulars of your mortgage will be the second thing I discuss with any potential new client. This is because the current status of your mortgage payment, and the equity you have in your home, help determine if you qualify for a Chapter 7 bankruptcy.
"Equity" quite simply is the value of your home, minus all the liens on the home (mortgages, home equity loans, tax liens, etc.). So, if your home is worth $150,000, but you have a $100,000 mortgage, and a $30,000 home equity loan, your equity is only $20,000. If you owe more on your home than it is worth, you have "negative equity". This is sometimes know as being "underwater" on a loan.
Why is equity so important to Chapter 7 bankruptcy? Because the federal exemptions available to protect the equity in your home from your creditors is limited. It is roughly $26,000 per filer (about $52,000 if the home is jointly owned with a co-filing spouse). Exemptions are very useful, but they are limited. If the equity in your home exceeds the exemptions, you have only two options. First, you can surrender the home, with the equity being liquidated to pay your creditors (not a great option!) Or, you can file a Chapter 13 bankruptcy and repay the unexempt equity, dollar-for-dollar, to your unsecured creditors (such as credit cards).
So, one of the first questions I ask a prospective client is, "How much is your home worth, and what do you owe on it?" Your first consultation will be more useful if you do a little research on the value of your home (checking online real estate websites such as Zillow) and find a most recent mortgage statement. If your equity is too great, we will need to look at a Chapter 13 bankruptcy, but if not you still may qualify for a Chapter 7 bankruptcy. Try to know the value and amounts owed on your home when meeting for your first consultation with your attorney,
A second important issue regarding mortgages and filing Chapter 7 bankruptcy is whether or not you are current on the mortgage. If you are behind on the mortgage, and you want to keep the home, you must file a Chapter 13 bankruptcy and catch up the arrears over a three to five year repayment plan. The Court will not let you file Chapter 7 and keep a home with arrears or while in foreclosure. However, you can file a Chapter 7 if you wish to surrender a home with arrears, and those arrears will be wiped out.
When I ask a prospective client about their mortgage payment, the current status of the payments is also important. If you are only a month or two behind, you can possibly catch up the payments and file Chapter 7. However, if you are three or more months behind, you will need to consider filing Chapter 13, or surrendering the home. Make sure you arrive at your initial consultation with this information.
(As a quick side note- the same holds true for car payments. If you are behind on your car at the time of filing, and want to keep the car, you will need to file a Chapter 13 bankruptcy, or surrender the car.)
So, after looking at your income, we must look at your mortgage situation to determine whether the equity in your home is fully exempt, and whether you are current on your payment. The third and final part of this blog post will discuss some miscellaneous issues that determine Chapter 7 bankruptcy eligibility. These issues will be discussed in my final post on the subject.
Contact us if you have any questions regarding your eligibility to file a Chapter 7 bankruptcy. I am an experienced Pittsburgh bankruptcy attorney who will be happy to discuss your situation at a free consultation.