It is one of the first questions homeowners ask me. And sometimes they are almost afraid to hear the answer.

They may have spent years building a life in that house. Their children grew up there. They finally have some equity. They are already worried about credit cards, lawsuits, taxes or falling behind on bills. The last thing they want is to make a financial problem worse by putting their home at risk.

So let me start with the most important point:

Filing bankruptcy does not automatically mean that you will lose your house.

Whether you can keep your home depends on several factors, including how much equity you have, what bankruptcy exemptions are available, whether you are current on your mortgage, what liens are against the property, how the property is owned, and whether you file Chapter 7 or Chapter 13.

In some situations, bankruptcy may actually make it easier to keep your home.

But we need to look at the numbers before the bankruptcy is filed.

The First Question: How Much Equity Do You Have?

When a New Jersey homeowner comes to us considering bankruptcy, one of the first things we need to determine is the equity in the property.

A simplified calculation is:

Current market value – mortgages and other liens = approximate equity

For example, suppose your home is worth $450,000 and you owe $375,000 on the mortgage. Your gross equity is approximately $75,000.

That does not automatically mean that $75,000 is available to a Chapter 7 trustee.

We also have to consider applicable bankruptcy exemptions, valid liens, ownership of the property, potential costs associated with a sale and the other facts of the case.

That analysis needs to happen before filing.

How Do We Determine What Your House Is Worth?

Home value can become extremely important in a bankruptcy case.

An online Zillow or Redfin estimate may be a useful starting point, but it should not automatically be treated as the final answer.

We need a reasonable and supportable estimate of the property’s current market value.

If there is little or no equity, a small difference in value may not change the bankruptcy analysis. But when the amount of equity is close to what can be protected, an inaccurate valuation can make a significant difference.

Sometimes obtaining a more reliable valuation before filing is worth the additional effort.

We do not want to discover after filing that your house is worth substantially more than you thought.

What Are Bankruptcy Exemptions?

Bankruptcy law does not simply take everything you own.

The law provides exemptions that allow debtors to protect certain property from creditors and a bankruptcy trustee.

Federal bankruptcy law includes a homestead exemption that can protect a certain amount of equity in a residence. Exemption amounts are periodically adjusted, so you should not rely on an old article, an online calculator or what someone who filed bankruptcy several years ago tells you.

The exemption analysis can also depend on your individual circumstances and how property is owned.

At Tomes Law Firm, we want to calculate the available exemptions before recommending that a homeowner file bankruptcy.

The time to discover an equity problem is before the bankruptcy is filed — not after.

Can I Keep My House in Chapter 7?

Possibly.

Chapter 7 is a liquidation bankruptcy. A Chapter 7 trustee can administer nonexempt assets and use the proceeds to pay creditors.

But that does not mean a Chapter 7 trustee automatically sells your house.

The important question is whether there is sufficient nonexempt equity to make a sale worthwhile after considering mortgages, liens, exemptions and the costs associated with administering and selling the property.

Many Chapter 7 cases are “no asset” cases because there are no nonexempt assets available for the trustee to distribute to unsecured creditors.

The mistake is assuming your case is one of them without doing the analysis first.

Chapter 7 vs. Chapter 13: Which Is Better If I Own a Home?

There isn’t one answer for every homeowner.

Chapter 7 may work well when the home’s equity can be protected, the homeowner is able to remain current on the mortgage and the other requirements for Chapter 7 are satisfied.

Chapter 13 may be particularly useful when the homeowner has equity that creates a Chapter 7 problem or is behind on mortgage payments and needs time to catch up.

Chapter 13 allows an eligible debtor with regular income to propose a repayment plan, generally lasting three to five years. In appropriate cases, it can allow a homeowner to cure mortgage arrears over the life of the plan while continuing to make the required ongoing mortgage payments.

So the question should not simply be: “Which bankruptcy gets rid of the most debt?”

The better questions are: “What are we trying to accomplish?” and “What property are we trying to protect?”

What If My Mortgage Is Current but My Credit Cards Are Killing Me?

This is an important situation because sometimes the house isn’t the financial problem.

Imagine a New Jersey homeowner who is current on the mortgage but has $70,000 in credit-card debt.

Every month, $1,500 goes toward minimum credit-card payments. The homeowner pays and pays, but the balances barely seem to move.

They are afraid to consider Chapter 7 because they assume bankruptcy means losing the house.

Before reaching any conclusion, we would calculate the home’s equity, review the mortgages and other liens, determine what exemptions are available, look at how the property is titled and determine whether the homeowner can realistically afford the house after bankruptcy.

If the equity can be protected and the homeowner otherwise qualifies for Chapter 7, eliminating dischargeable unsecured debt could dramatically change the monthly household budget.

The money that had been going toward credit-card minimum payments can instead be available for the mortgage, utilities, food, insurance and other necessary expenses.

Bankruptcy may not be the threat to the house. The overwhelming debt surrounding the house may be the threat.

What If I Am Behind on My Mortgage?

Now we are dealing with a different problem.

If you are behind on your mortgage and want to save your home, Chapter 13 may provide an important option.

Rather than having to come up with the entire mortgage arrearage immediately, a Chapter 13 plan may allow you to catch up those arrears over time while maintaining your required ongoing payments.

This can make Chapter 13 a powerful tool for some homeowners who have enough income to afford the home going forward but need time to deal with what they already owe.

Can Bankruptcy Stop a Foreclosure in New Jersey?

A bankruptcy filing generally creates an automatic stay, which stops most collection activity.

Depending upon the circumstances, the automatic stay can temporarily stop foreclosure activity.

But bankruptcy should not be treated as a last-minute button to push on the eve of a sheriff’s sale.

There are exceptions to the automatic stay, creditors can seek relief from the stay, and prior bankruptcy filings can affect how the stay operates.

More importantly, we need enough time to determine whether bankruptcy actually solves the underlying problem.

If you have received a foreclosure complaint, sheriff’s sale notice or other legal papers concerning your home, do not wait until the last possible moment to speak with a bankruptcy attorney.

The earlier we review the situation, the more time we have to evaluate your options.

What Happens to My Mortgage If I File Bankruptcy?

A mortgage is different from an ordinary credit-card debt because the mortgage is secured by your home.

Bankruptcy may eliminate your personal liability for many debts, but a bankruptcy discharge does not ordinarily erase a valid mortgage lien against the property.

If you intend to keep the house, you need a strategy for dealing with the mortgage.

That is why “Can bankruptcy eliminate my mortgage?” and “Can I keep my house after bankruptcy?” are two very different questions.

Do I Have to Reaffirm My Mortgage?

You may hear that you must “reaffirm” a mortgage to keep your house after Chapter 7.

The issue is more complicated than that.

A reaffirmation agreement can cause a debt that otherwise might be discharged to remain a personal obligation after bankruptcy. Signing one can therefore have significant consequences.

Do not sign a reaffirmation agreement — or assume that one is required — without discussing the specific situation with your bankruptcy attorney.

What If I Have a Lot of Equity?

Significant home equity does not necessarily mean bankruptcy is impossible.

But it may change which bankruptcy chapter makes sense.

Someone who owns a $700,000 house with a $200,000 mortgage presents a very different Chapter 7 analysis from someone whose mortgage is close to the value of the property.

If there is substantial nonexempt equity, Chapter 7 could put the property at risk.

Chapter 13 may provide another option because a Chapter 13 debtor generally retains property while making payments under a court-approved plan. However, nonexempt equity can affect how much must be paid to unsecured creditors through the plan.

Owning a house does not disqualify you from bankruptcy. But equity cannot be ignored.

What If My Spouse Owns the House With Me?

Tell your bankruptcy attorney exactly how the property is titled.

Do not assume that because only one spouse is filing bankruptcy, the house does not matter.

How property is owned can significantly affect the analysis.

We may need to review the deed, mortgages, liens, equity and applicable exemption law before advising you about what a bankruptcy filing could mean for the property.

Don’t Forget About Second Mortgages, HELOCs and Other Liens

• Second mortgages
• Home-equity lines of credit
• Judgment liens
• Federal or state tax liens
• Property-tax obligations
• Condominium or homeowners’ association obligations
• Any other liens or claims affecting the property

We need the complete picture before deciding what bankruptcy can and cannot accomplish.

What About Judgment Liens?

A creditor who sued you and obtained a judgment may have rights that need to be considered separately from an ordinary unsecured debt.

In some bankruptcy cases, certain judicial liens that impair an exemption may potentially be avoided under the Bankruptcy Code.

That can be an important issue for someone who owns a home and was sued by a credit-card company or another creditor before filing bankruptcy.

This is another reason we want to know about every lawsuit and judgment before the case is filed.

What I Don’t Want You to Do Before You Call Me

When people are scared about losing their home, they sometimes try to “fix” things before talking to a bankruptcy attorney.

Unfortunately, some of those decisions can make the situation worse.

Before getting legal advice:

• Don’t transfer your house to your spouse, child or another relative.
• Don’t give away your interest in the property.
• Don’t drain your retirement account to pay credit cards or catch up a mortgage without first understanding the consequences.
• Don’t take out a home-equity loan simply to pay unsecured credit-card debt without evaluating your other options.
• Don’t suddenly use available cash to pay down your mortgage because you think that will protect the money in bankruptcy.
• Don’t pay one creditor simply because that creditor is threatening you without understanding how the payment could affect a future bankruptcy.
• Don’t assume you have too much equity to file bankruptcy.

Bankruptcy law requires disclosure of transfers and financial transactions made before filing. Trustees also have significant powers to investigate and, in appropriate circumstances, challenge certain pre-bankruptcy transactions.

There may be perfectly lawful bankruptcy planning available.

Talk to us before you start moving money or property around.

Be Especially Careful Before Taking Money From Your Retirement Account

This deserves separate attention.

People sometimes take money out of a 401(k), IRA or other retirement account because they are desperately trying to save their house or keep up with credit-card payments.

That can be a very expensive mistake.

Certain retirement assets receive significant protection under bankruptcy law. Taking money out of a protected retirement account to pay debts that might otherwise be discharged can mean giving up an asset you could potentially have kept.

A retirement distribution can also create tax consequences.

Before using retirement money to solve a debt problem, find out whether the debt itself can be solved another way.

Can You Keep the House — and Should You Keep the House?

These are two different questions.

There are cases where we may determine that a home can legally be protected in bankruptcy.

Then I want to ask another question: Can you realistically afford it?

Add up the mortgage, property taxes, homeowners’ insurance, utilities, repairs, association fees and everything else required to maintain the property.

If keeping the house means that you will immediately struggle again after bankruptcy, we need to talk about that.

My goal is not simply to get someone through a bankruptcy case.

The goal is to help that person come out on the other side in a better financial position.

Sometimes keeping the home is absolutely part of that fresh start.

Sometimes we need to have the harder conversation about whether the house itself is preventing the fresh start.

Before We File Bankruptcy for a Homeowner, We Want the Numbers

When Tomes Law Firm evaluates a New Jersey homeowner’s bankruptcy options, some of the questions we want answered include:

• What is the property’s realistic current market value?
• What is owed on the first mortgage?
• Is there a second mortgage or HELOC?
• Are there judgment, tax or other liens?
• How is the property titled?
• How much equity is potentially protected by applicable exemptions?
• Is the mortgage current?
• If not, how much is needed to bring it current?
• Is there a pending foreclosure or sheriff’s sale?
• Are property taxes or association fees behind?
• Can the homeowner realistically afford the property after bankruptcy?
• Would Chapter 7 or Chapter 13 better accomplish the client’s goals?

Only after answering those questions can we give meaningful advice about what bankruptcy could mean for the house.

Frequently Asked Questions About Houses and Bankruptcy in New Jersey

Can I keep my house if I file Chapter 7?

Possibly. The answer depends heavily on the amount of equity, available exemptions, liens and the other facts of your case. If you want to keep a home with a mortgage, your ability to continue making the required payments is also important.

Can I file Chapter 7 if I have equity in my house?

Yes, having equity does not automatically prevent you from filing Chapter 7. The important question is whether that equity can be protected. Significant nonexempt equity can create a risk that a Chapter 7 trustee will seek to administer the property.

What if my house is completely paid off?

A mortgage-free home may have substantial equity, making the exemption analysis particularly important. Do not assume that because you have no mortgage, Chapter 7 is automatically safe.

Can Chapter 13 help stop foreclosure?

Chapter 13 can be an important tool for eligible homeowners facing foreclosure because it may allow mortgage arrears to be cured over time. Filing bankruptcy also generally invokes the automatic stay, although exceptions and limitations apply.

Can a bankruptcy trustee take a house I own with my spouse?

Joint ownership does not automatically put the property outside the bankruptcy case. How the house is titled, the amount of equity, applicable exemptions and other circumstances all matter. Have an attorney review the deed before filing.

Should I sell or transfer my house before filing bankruptcy?

Do not sell, transfer or give away an interest in real estate in anticipation of bankruptcy without first obtaining legal advice. Pre-bankruptcy transfers must be disclosed and can create serious problems.

Do Not Decide You Can’t File Bankruptcy Just Because You Own a Home

If fear of losing your house is the reason you have avoided speaking with a bankruptcy attorney, get the facts before making that decision.

Do not decide that bankruptcy is impossible because you own a home.

And do not decide that Chapter 7 is safe simply because someone told you that “you get to keep your house.”

Have the equity, liens, ownership and exemption analysis done before you file.

At Tomes Law Firm, we help New Jersey individuals and families evaluate Chapter 7 and Chapter 13 bankruptcy and understand what will happen to their property before making the decision to proceed.

Your house may be the most valuable asset you own. It deserves more than a guess.

Contact the New Jersey Bankruptcy Lawyers at Tomes Law Firm today at 732-333-0681 or online at tomeslaw.com for a confidential no obligation free consultation.