I Think I Need To File A Chapter 7 But I’m Scared I May Lose My Home!

by Adrian Lapas, Esq.

September 2, 2010

Many times people come into my office and want to file a chapter 7 but they are worried about losing their home in bankruptcy.  Often, this fear probably means they have delayed seeking some advice for a very long time.

In most instances, the chapter 7 trustee is not going to sell your home to pay your creditors.  Why is this?

Well, under bankruptcy law, you are entitled to exempt a certain amount of property. 

That means you get to keep a certain amount of property so that you are not completely destitute.  For example, under the federal exemptions, a debtor can exempt up to $21,625.00 in equity in real estate used as the debtor’s residence.  For a married couple, this is doubled (both are allowed to claim this exemption).

But, many states, including North Carolina, have opted out of the federal exemptions so in North Carolina, a debtor may exempt up to $35,000.00 in equity in residential real estate (again, for a married couple jointly owning the real estate, this is doubled).

In order to determine your net equity, you take the value of your home and subtract any mortgages that you have on it.  For example, if your house is worth $200,000.00 and you have a first mortgage on which you owe $110,000 and a second mortgage on which you owe $40,000, you have $50,000 in net equity.  If you do not have more equity than you can exempt, the chapter 7 trustee is not going to be interested in selling your home.  In addition, it will cost the trustee money to sell the house and that also factors in the analysis.

Another very important exemption involves real estate held as husband and wife.  This special property interest is called tenants by the entirety.  Real estate held as tenants by the entirety is not subject to the claims of individual creditors.  This means that if property is held as husband and wife, neither spouse’s creditors have any claim against the real estate.  It is possible that if the husband and wife debtors own their home and do not have a mortgage and their only creditors are credit cards in either husband’s name or wife’s name, the real estate will not count as an asset to be sold by a chapter 7 trustee.

Once it is determined that the home does not have any equity over what can lawfully be exempted, the debtors will be required to continue to make the mortgage payments on the home.  As long as the payments are made to the mortgage creditor(s), the debtors will not be in any danger of losing their home.

So, if you think that you need consider bankruptcy but you are afraid you may lose your home, talk with an experienced bankruptcy attorney.  Most likely, you will have nothing to fear as long as you keep making your monthly mortgage payments.

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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.

Last modified: December 20, 2012