Many people don’t really understand the bankruptcy process. What they know about it comes from movies or stories that they hear, which may not be accurate. The lack of public knowledge about bankruptcy leads to the dissemination of misinformation about what happens during different forms of bankruptcy.
One of the biggest worries reported by those considering bankruptcy is the impact that it can have on their homes. The truth is that different forms of bankruptcy can impact your home ownership in different ways. Those who pass the means test and qualify for Chapter 7 need to look carefully at the amount of equity that they have in their homes.
If their equity exceeds the personal property exemption for New Jersey, the courts will likely order the liquidation of that equity to repay creditors before they can receive a discharge. However, just because you have substantial equity in your home doesn’t mean you have to suffer without debt relief. Instead, it simply means that you need to consider Chapter 13 instead of Chapter 7 bankruptcy.
Chapter 13 bankruptcy doesn’t require asset liquidation
The government also refers to Chapter 13 bankruptcy as a wage earner’s plan. Individuals with substantial income or assets can still qualify for Chapter 13 bankruptcy even if they can’t qualify for Chapter 7. Filing bankruptcy can free up money to pay your mortgage or even stop foreclosure.
Instead of receiving a discharge after the liquidation of certain assets, those who file for Chapter 13 bankruptcy instead enter into a repayment plan. The courts will help individuals renegotiate that payment with creditors as part of the process. The individuals will then send monthly payments directly to the bankruptcy court for three to five years. At the end of that time, the remaining balance receives a discharge and the individuals are free to move on with their lives.
That discharge does not affect your mortgage
One thing that confuses a lot of people about bankruptcy discharge and mortgage debt is that while filing bankruptcy technically forgives the mortgage, that does not mean you own your house outright. In fact, unless you work with the bank to reaffirm your mortgage or a new mortgage on the same property, you could very well lose your home.
Reaffirming your mortgage means that you file paperwork that states that you affirm this debt regardless of your bankruptcy discharge. That protects your lender from losing out on the money they have invested in the property, and it also allows you to retain your ownership in the home and your accumulated equity.
Just because you are in significant debt, it does not mean that your home ownership days are done. Working with an experienced bankruptcy attorney can secure the assistance you need in preparing to file for Chapter 13 bankruptcy and protecting the equity in your home.