There are many myths that surround bankruptcy. For instance, many Americans worry that they will automatically lose their home if they file bankruptcy.
While it is possible to lose one’s home to bankruptcy, it is not common. According to FindLaw, whether or not your house is at risk depends on the type of bankruptcy that you file and the equity in your home.
Why does type of bankruptcy matter?
The two most common varieties of personal bankruptcy are Chapter 7 and Chapter 13. Chapter 13 is a reorganization bankruptcy, and people who file for Chapter 13 have no risk of losing their property. In fact, the point of a Chapter 13 bankruptcy is to have no risk of losing assets.
A Chapter 7 bankruptcy is a liquidation. With a Chapter 7 bankruptcy, there is a possibility of losing your home depending on the equity in the property.
What is equity?
The difference between the current market value of the property and balances on home equity loans or mortgages is your equity. If the equity in your property is negative, the court will find it exempt from liquidation. It is only if you have equity over the set exemption limit that you might lose your home or need to “buy it back” from the bank.
Keep in mind that in certain situations this may be a boon. Losing a home through bankruptcy is one of the few times that a property owner can “walk away” from a mortgage with no further consequences. If you cannot afford your mortgage payments, losing your home might be a positive.