Can you file Ch. 13 bankruptcy if you own a home?

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Dear Bankruptcy Adviser,
Don’t you have to file a Chapter 13 bankruptcy when you have a home? You are not eligible for a Chapter 7, correct?
— Gil

Dear Gil,
This is a very common misconception about the two different bankruptcy options. Many clients assume that homeownership means you must file one type of bankruptcy only. This is not the case. The vast majority of homeowners can still file Chapter 7 bankruptcy.

The typical Chapter 7 bankruptcy, also known as a fresh-start bankruptcy, allows you to wipe out most or all of your debt while keeping your home, vehicles, retirement money and other personal property. In Chapter 7, you don’t pay back your creditors, but the equity in your home will be one of the main factors used to determine whether you are eligible for this type of bankruptcy.

Equity is important in bankruptcy filings because it shows the courts whether there is money available somewhere to pay off your debts — in this case, your home. Your home could be sold and the profits used to pay off those debts. If there is little to no equity in the home, you are more likely to qualify for a fresh start.

For example, after the recent mortgage crisis, many people lost much of the equity in their primary residences. One of the benefits, if you can call it that, of the crisis was that many people were able to qualify for Chapter 7 bankruptcy. Since home equity was one of the major reasons a person could not qualify, the loss of that equity cleared the way for more Chapter 7 cases.

Now, there are still reasons some people need to file Chapter 13, even when there is no equity in the house. A Chapter 13 bankruptcy is a reorganization of some or all of your debt to be paid back over a three- to five-year period. In some cases, a person falls behind on his or her mortgage payments or property tax payments, and the lender or county property tax assessor requires the homeowner to bring the balance current immediately. The homeowner files Chapter 13 to catch up on those payments over a longer period of time. The bankruptcy gives the homeowner protection against foreclosure while he pays back the delinquent balances.

It is good to make informed decisions. Contact a local bankruptcy attorney about your particular case to make the right decision for you and your family.

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