I can’t file for bankruptcy – I’ll lose my house (car, boat, etc.)!

This has got to be the #1 misconception I hear on an almost daily basis from people. They often refuse to consider filing for bankruptcy relief because they believe, often incorrectly, that they will lose their home or car. This is not necessarily true and one should not refuse to consider bankruptcy as an option under the (oft-mistaken) belief that it always is true.  Let me explain.

For the purposes of this discussion, I am going to focus on the more frequently used chapter of bankruptcy law – Chapter 7. This is the chapter under which you get rid of your dischargeable debts (typically).  When you file for relief under Chapter 7 of the Bankruptcy Code, you (referred to as the ‘debtor’), are asking the Court to wipe out your unsecured debts and perhaps some or all of your secured debts as well.

Since the economy has taken such a big downturn, so many home mortgages that once were secured by the property no longer are secured, at least in part. For example, a home that used to be worth $400,000 that had an outstanding mortgage of $300,000 had a completely secured loan. There was $100,000 in equity in the house. The entire amount of the mortgage owed to the lender was secured by the value of the property. But….

Fast forward to 2011 . That same home now is worth only $200,000, yet the debtor still owes $250,000. That debt is partially unsecured since the debt exceeds the value of the property by $50,000 and there is no equity in the house. In fact, there is what is sometimes referred to as ‘negative equity’ or the house being ‘underwater.’ Essentially, you owe more than the house is worth. The difference between those 2 values is the amount by which your house is underwater.

Either way, if the equity in your home is less than the exemption amount you are entitled to use in your jurisdiction and you can afford to get and keep your house payments current, you likely get to wipe out your dischargeable debts AND keep your house. Isn’t that a relief?

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