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Home-ownership in Chapter 7 and Chapter 13 bankruptcy cases

In our previous post, we began speaking about one of the main differences between Chapter 13 bankruptcy and Chapter 7 bankruptcy when it comes to home ownership. The difference, as we noted, is that because Chapter 13 bankruptcy does not involve the liquidation of non-exempt assets, it gives debtors a better opportunity to save their home. By contrast, Chapter 7 bankruptcy is not likely to allow most homeowners to save their homes. Why is this?

First of all, Chapter 7 bankruptcy only allows debtors a small exemption for a homestead. A homestead is a residence occupied by the owner and the land on which the residence sits. In most cases, the exemption amount is not going to be large enough to allow a debtor to keep his or her home. Filing for Chapter 7 bankruptcy, then, is only going to buy a debtor a bit of time before the foreclosure process is pushed forward and their home taken away.

Chapter 13 bankruptcy, by contrast, does not involve the liquidation of assets, but the “reorganization” of debts so that a debtor is able to catch up with past due payments. As long as a Chapter 13 debtor has enough income to stay current on his or her mortgage payments, in addition to payments to the bankruptcy court, he or she does not have to worry about losing his or her home. Of course, many debtors don’t have the financial ability to do this.

Deciding whether to file for Chapter 13 or Chapter 7 bankruptcy is sometimes an easy decision, particularly when one is barred from Chapter 7 bankruptcy based on the financial requirements. For those who have a choice, though, it is important to carefully explore the options with an experienced attorney. Having a good understanding of exemptions is an important part of the decision, and we’ll take a closer look at this issue in a future post.

Sources:

United States Courts, “Chapter 7—Bankruptcy Basics,” Accessed Nov. 20, 2015.

LA Revised Statutes Title 20: Homesteads and exemptions

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