10 May You’ve Got Choices For The House After Bankruptcy
Filing bankruptcy does not predetermine what happens to the house after bankruptcy.
In an era of underwater houses, the home may just pass through bankruptcy in the direction of your choosing thereafter.
The eventual fate of the property does not necessarily have to be decided before a bankruptcy case is filed; if the house is either fully exempt or hopelessly underwater, there is time to make a decision.
The administration of assets in Chapter 7 bankruptcy is all about finding unencumbered, non exempt value in assets that can be turned into cash for the benefit of creditors.
In Chapter 13, the calculation of that unencumbered, non exempt equity is one determinant of how much the debtor must pay into the Chapter 13 plan. The debtor keeps the assets, but effectively buys them back from creditors.
If the house has no non exempt equity, after deducting the costs of selling it, a bankruptcy trustee is not interested in administering the property. The trustee has no desire to take property from a debtor just so the debtor keeps nothing: the trustee hopes to find value for creditors.
So, what are the options for a house after bankruptcy:
- Keep the house and continues making payments, just as before.
- Surrender the house, and generally live there payment free until there is a foreclosure.
- Seek modification of one or more of the loans secured by the property.
- Sell the property for its current value with the cooperation of the secured creditors.
Each choice has its advantages, but the choice is seldom dependent on how the bankruptcy plays out.
Pitfalls I encounter start with the client who believes she must, at any cost, keep the house. Sometimes the fixation is wrapped in “we must do it for the kids”.
Sometimes it represents a fear that she will never get into the real estate market again. Sometimes it’s the fear of change. Seldom is the compulsion to keep an underwater, overly expensive house grounded in sound finances. More about whether you should keep the house.
After a bankruptcy discharge, whatever choice the homeowner makes, the concern about foreclosure or short sale triggering cancellation of debt income is gone. The debt secured by the house is wiped out by the bankruptcy as a personal liability of the borrower; further developments with respect to the house won’t result in a tax debt.
So, take your time to make a good decision about in which direction you head.
Image courtesy of Mike Quinn.
Cathy Moran, Esq.
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