The short answer to this question is that most persons who file a Bankruptcy Petition will be able to keep their home.
Exempting a Home in Bankruptcy
In a Chapter 7 Bankruptcy, the Debtor gets to keep property that is “exempt.” This property is still subject to any mortgages, or other valid liens. Some liens, such as judgments, can be avoided in bankruptcy, to the extent that they impair an exemption. Consult your bankruptcy attorney if you have questions about this.
Most persons who file Bankruptcy in Pennsylvania use the federal bankruptcy exemptions. This allows for up to $22,975 in equity to be exempted in your home (the amount will increase slightly on April 1, 2016), and the amount is doubled if the home is jointly owned.
The amount of equity in a home is determined by taking the fair market value, and subtracting the payoff amounts of the mortgage, and any other liens on the property. If the result is significantly more than the amount that can be exempted, the property would be at risk in a Chapter 7 Bankruptcy. In this situation, many debtors might choose to file a Chapter 13 Bankruptcy, which would allow them to keep the home, and propose a plan under which they would make full or partial payments to their creditors.
Dealing with a Mortgage Foreclosure in a Chapter 7 Bankruptcy
Exempting the home is only a part of the issue for many debtors: it will still be necessary for them to get current on the mortgage, and make all of their future mortgage payments. In some cases, all that is needed is to obtain a discharge from their unsecured debts to allow them to make their home payment. Other options include making arrangements with the bank, or pursuing a mortgage modification request. In the Western District of Pennsylvania, the Bankruptcy Court has a program to assist Debtors in obtaining mortgage modification agreements. A similar program is in place in the Court of Common Pleas of Blair County, Pennsylvania. Debtors should understand that mortgage modification is a voluntary program that requires cooperation from the bank or mortgage servicer.
Chapter 7 Debtors should understand that although filing their bankruptcy will provide some temporary relief, it won’t solve a mortgage foreclosure problem.
Dealing with a Mortgage Foreclosure in a Chapter 13 Bankruptcy
If a mortgage problem cannot be dealt with outside of bankruptcy, a Chapter 13 Bankruptcy Plan may be used to force the bank to accept a plan. At a minimum, a Chapter 13 Plan would provide for making the current mortgage payments, along with an additional amount that is enough to bring the account current within 3 to 5 years. If the plan meets the requirements of the Bankruptcy Code, and is confirmed by the Court, it is binding on both the debtor and the bank.
A Chapter 13 plan can be used to save your home, even after a mortgage foreclosure has been filed – so long as the bankruptcy case is filed before your home is sold at a Sheriff’s sale.