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Bankruptcy, mortgages and the family home

Bankruptcy is a nerve-wracking process for anyone, but none fear it to quite the same level as home owners. The process itself can feel very unsettling and the prospect of losing a beloved home can serve to make the application and consequences shake the individual even further. A massive part of the bankruptcy process comes in the question of what to do with the person’s home. However, the process is designed to help those in debt pay back as much as possible whilst allowing them to keep their family home.
Looking to equity It is possible in some cases to file for bankruptcy and keep the home. Whether or not this will be possible will be down to the amount of equity on the house. When filing for bankruptcy, the person in debt is assessed as they are allowed to keep some property which is known as “exempt property”. Used as a place to live, the “exempt property” will not be included in liquidation if the house is without non-exempt equity. There’s a reasonably easy way to figure this out which should help provide some guidance. The amount of non-exempt equity is taken from the house’s market value with a subtraction of any loans and debts that need to be paid; this is called “unencumbered equity”. Then, consider your homes exemptions in the bankruptcy code, take that from the unencumbered equity, and if that number is less than what you owe, you’ll be able to keep the house. Unfortunately for those whose number is higher than that they owe, the house will more than likely be sold to pay off the debts owed. Luckily for many, 77% of people who actually file for bankruptcy are non-homeowners.
Beyond bankruptcy Given the economic climate, it is no wonder that many are worried about what will happen to their home if they lose their job. While bankruptcy is a possibility, it is not the only option open to most people and many will not automatically lose their home. Some may be able to reach an arrangement with their lender and a discussion like this is always advisable. This can lead to a process called loan modification which is incredibly common for many in this situation. The lender will provide a variety of options depending upon the amount of time the person has had their loan. An example would be, for a person who has owned their home for several years and has gained some equity; the lender may refinance and extend the loan, but give a lower interest rate and smaller monthly payments. There are many options within these schemes that can work for most during unemployment.


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