Can I Keep My House If I File For Bankruptcy?

by Luke Homen

This is one of the main issues that keeps people from considering bankruptcy. They worry that it automatically means losing their home, vehicle, and other assets they need to live. But don’t worry! Almost everyone who files for bankruptcy is allowed to keep their home, their car, and their personal possessions! Learn more about what may happen with your home and vehicle in Chapter 7 or Chapter 13 bankruptcy, and how working with an Oklahoma bankruptcy attorney at Convenient Bankruptcy may help you.

Types of Bankruptcy and Property Exemptions

When you file for Chapter 7 bankruptcy, you agree to liquidate certain assets to pay back your creditors as much as possible. These assets typically refer to valuable but non-essential items, like a second home, luxury cars, minerals and boats. Any qualifying debt that remains after this liquidation is discharged. Chapter 13 bankruptcy, on the other hand, restructures your debts into a manageable monthly payment that you must make for three to five years.

Exemptions play an important role in Chapter 7 bankruptcy. You do not have to sell all of your assets to pay back creditors—that would be unreasonable. Instead, each state has a list of exempt property types — these are the things you get to keep! You can keep property up to a certain value before you have to sell it off and use it to pay back creditors. This allows you to protect your assets and get a real fresh start.  For most people, most or all of your assets can be protected by an experienced attorney, but you will need high-quality legal advice.  There are exceptions, limitations and pitfalls that you may need to avoid, depending on your particular circumstances.

Homestead Exemption and Keeping Your House

Each state has a homestead exemption that allows bankruptcy filers to keep a home in which they reside. However, there are limitations. The good news is that Oklahoma has an extremely generous homestead exemption!  You can exempt all of the equity in your home or manufactured home—the property in question simply has to be your primary residence.

There are a couple important limitations though. If you live inside city limits and you live on more than an acre, the excess acreage won’t be protected.  Another important limitation: if you use more than 25% of your home’s square footage for business, your exemption is just $5,000. Also, if you haven’t owned your home for at least 1,215 days prior to filing, there may be limits on the dollar amount of homestead you can claim. Other states are much more limited; the strictest states allow just $5,000 to $15,000 of your home’s equity to be exempt.  There are other very unusual situations that may apply, so it’s very important to discuss your situation with an attorney.

Vehicle Exemption and Keeping Your Car

Many states also have vehicle exemptions to allow bankruptcy filers to keep their personal vehicle. Again, this varies quite a bit from state to state. Some states have no vehicle exemption and require filers to protect their vehicle by using their wildcard exemption. However, Oklahoma allows each person filing bankruptcy to exempt one vehicle with up to $7,500 in equity. If a married couple is filing bankruptcy together, each person can protect one vehicle for $7,500, or the couple can combine their exemptions to protect up to $15,000 in equity in one vehicle.

And to protect your vehicle, be sure to keep making all required payments on time and keep proper insurance in place at all times.

It’s also important to recognize that these limitations aren’t based on the total value of the car, but equity in the vehicle.

Equity and Non-Exempt Assets

Your bankruptcy attorney will help you assess the equity in your home and vehicle to determine whether or not they are exempt from liquidation in bankruptcy. Your equity is what would remain if you sold the asset for fair market value and paid off the loan in full. For example, if you own a $450,000 home and owe $300,000 on it, you have $150,000 in equity. If you own a vehicle that is worth $4,000 and owe $3,500, you have $500 in equity. The amount of equity you have determines if you can keep your home or vehicle during bankruptcy.

There are risks with non-exempt assets. If you cannot account for them in one of the exempt categories allowed under Oklahoma law, they may be liquidated to decrease your overall debt burden. There are many types of exemptions, and your bankruptcy attorney can help you use them most strategically to protect your assets as much as possible.

Exempt vs. Non-Exempt Equity

Exempt equity is any equity that falls within the limits of your state’s exemptions for the type of asset in question. Consider, for example, Oklahoma’s $7,500 vehicle exemption. If you owe $10,000 on a vehicle worth $20,000, you have $10,000 in equity. State law only allows you to have $7,500 in equity. You have $7,500 in exempt equity and $2,500 in non-exempt equity.

There are a few ways to handle this. First, the trustee may sell the asset in question. You receive the amount you are entitled to for your exemption and the rest goes to your creditors. Second, you may save the asset by paying the amount of non-exempt equity to the trustee directly.  They may even be willing to accept less, since it saves them from the trouble of selling the asset.  In certain circumstances, the trustee may also decide that there isn’t enough valuable in the asset to create “a meaningful distribution to creditors,” and you may be able to keep even a non-exempt asset!

Otherwise, you may wish to look into Chapter 13 bankruptcy if you have substantial equity that cannot be protected via exemptions and that you cannot afford to risk losing in Chapter 7.

Reaffirmation Agreements in Chapter 7

Generally, Chapter 7 results in the discharge of all qualifying debts. Reaffirmation agreements allow you to keep chosen loans in order to keep the assets secured by them. When you sign a reaffirmation agreement, you essentially agree to maintain responsibility for the debt and continue making payments.

Reaffirmation agreements aren’t always required. Some creditors allow you to keep your secured property as long as you stay current on the loan associated with it. This protects you from the risks of reaffirmation agreements, but since these payments are generally not reported to credit bureaus, they will not help your credit.

Before signing anything, discuss your options with your bankruptcy attorney. Reaffirmation agreements come with risks. If your financial situation changes in the future and you are no longer able to make payments, you are still obligated to make them. If you stop making payments, the creditor can sue you and you are personally liable for whatever is owed.

The decision of whether to sign a Reaffirmation agreement is very case-by-case specific, depending on your finances, the particular lender involved, and other factors.  This is a decision you will make when you file your case, so you will have plenty of time to get the advice you need from your bankruptcy attorney.

Chapter 13 Bankruptcy and Property Retention

This type of bankruptcy has significant benefits. In Chapter 13, you will use a Repayment Plan that covers all arrears for your secured debts and keeps you up-to-date on current payments. Asset retention is one of the main reasons many people opt for Chapter 13 bankruptcy. Keeping your home and vehicles can make it far easier to maintain your lifestyle and current employment.

The Repayment Plan will have a monthly payment amount that will be designed by your attorney — and eventually approved by your creditors, trustee, and judge — and your payment amount will be based on your specific case. Your income, your debts, and your assets will all be taken into consideration, along with your monthly budget.

It is crucial to stick to your Repayment Plan. This Plan will be approved by the Bankruptcy Court, and straying from it at all can lead to significant consequences.

Negotiating With Creditors

Outside of bankruptcy, other options may help you keep your assets. If you negotiate with creditors directly and communicate your financial hardships, it is sometimes possible that they may be open to restructuring or modifying your loan in a mutually beneficial way. Loan modification options may change the duration of the loan, the interest rate, or your monthly payments. If your financial difficulties are temporary, you may seek a temporary forbearance that lets you get back on your feet. Finally, refinancing may allow you to benefit from existing equity in your asset.

There are numerous options available to borrowers struggling to make payments. Talking to a bankruptcy attorney is key if you want to find the best solution for your specific financial needs.

Consultation With Bankruptcy Attorney

Before you get too far into your calculations and considerations, you should set up a consultation with a bankruptcy attorney. There is a lot that goes into equity and exemptions, and a bankruptcy attorney will be able to provide a clear picture of your situation. If you have non-exempt equity, they can help you figure out how to deal with it in a way that protects your assets. An Oklahoma City bankruptcy lawyer at Convenient Bankruptyc will look at your financial circumstances and recommend the best course of action for your unique needs – we handle Chapter 7 & 13 filings throughout the state of Oklahoma including Tulsa, Edmond, Norman and Lawton.

This is one area of the law where a DIY approach can cause you severe financial losses. Over- or underestimating the value of your assets can lead to issues with the trustee or cause you to liquidate assets that don’t need to be liquidated. There is a lot at stake in bankruptcy, and it’s worth a consultation with a bankruptcy lawyer.

Ready to schedule your consultation and find out your next steps? The team at Convenient Bankruptcy is waiting to hear from you. Contact us online or call us at 405-296-0069 to set up a time to talk.