Dear Bankruptcy Adviser,
I just recently purchased a home, so can filling bankruptcy take away my home somehow? What are the advantages and disadvantages?
Russell, first off, congratulations on buying your new home. I'm sorry to hear that you're being forced to consider bankruptcy, but at least you're doing so from a position of strength. The key will be to determine the amount of equity you currently have in the house.
Past a certain point, your only bankruptcy option will be a Chapter 13 bankruptcy, which calls for a repayment plan. But because you bought the property recently, you may qualify for a Chapter 7, which would eliminate all your unsecured debt and give you a great fresh start.
Each state has different amounts of equity you can protect while still qualifying for Chapter 7. Some states allow for very little equity protection. Others, such as Florida and Texas, allow you to protect all the equity in your home so long as you are living in the house. A rental property would only be protected if you owe more on the property than it is worth. It would be useful for you to consult a local attorney to get the information about your state's laws.
Without knowing your financial situation or even the state in which you live, I can tell you this: I have seen many people in your position file bankruptcy. The logic is that once you have the house, it might be worth it to eliminate all the credit cards and start fresh. Granted, this is taking advantage of the bankruptcy laws and will undoubtedly upset your creditors (and anyone who believes you should not own a home if you cannot pay your other debt). However, the system, created by the powers that be, believes that people will do more to protect their home, and so it has created these exceptions to help all of us do that. You'll need a good attorney to assist with this kind of aggressive financial planning, but if you do receive Chapter 7 bankruptcy protection, it will be easier to afford your mortgage payment because you'll have no unsecured credit card debt.
Advantages and disadvantages of Chapter 7 bankruptcy:
- It will eliminate all your unsecured credit card debt while allowing you to keep your home.
- Bankruptcy improves your monthly cash flow, making your bill-paying easier.
- You will likely be able to re-establish credit immediately after your bankruptcy has been discharged. Credit card companies actually look kindly on homeowners. They see that you have no debt, cannot file bankruptcy for another eight years and now own a home. If you default on future credit card payments then the creditor (or collection agency) will be able to place a lien against your property.
- Your credit score will be low, and this could bias future employers against you.
- If you want to refinance the property after filing bankruptcy, or borrow for any other reason, you will get much higher interest rates. You need to be careful because if you have a variable interest mortgage loan, then as interest rates continue to rise you could be faced with a very large future mortgage payment.
- Bankruptcy will remain on your credit report for 10 years.
A local attorney can advise you about all the available options.
Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "bankruptcy" as the topic.