How Will Bankruptcy Affect The Ownership Of My House?

How Will Bankruptcy Affect The Ownership Of My House

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People stay away from the idea of filing for bankruptcy. This reverence can be exacerbated by the thought of losing one's house and becoming homeless in the procedure. Since 2000s, many people have built their "wealth" based on the increasing appraisal of their homes. Filing bankruptcy appears to be such a disgraceful affair that people stay away from it at all cost. A big reason people procrastinate on their decision for filing because they are worried what will happened to their home once they have filed for bankruptcy. Many people do not know if they will be allowed to keep their home even after they have filed for bankruptcy protection.

Whether you can keep your house or not depends on the type of bankruptcy you will be filing. In the case of Chapter 13 bankruptcy, provided that you remain to pay the mortgage, you will be granted possession of your house and will not lose it to bankruptcy. If you choose to apply Chapter 7 bankruptcy, the determination if you can retain your home is a little trickier. Generally speaking, you can keep your house when you are filing bankruptcy if you can afford to pay the monthly mortgage and the equity in the home is exempt.

Is there a time when I should give up my house

To walk away from the house that you have been living in, mathematically speaking, the market value of the house has to be greatly lower than the mortgage(s) that is placed on the house. In this scenario where the house is not worth as much as the mortgages that has been placed on it, this is a good candidate for you to walk away from this house. Please note that this choice is not everyone because you might still have to find an alternate place to live.

Is short sale a better option for you?

A short sale is an agreement by the lender to take less money than was owed to the lender. An illustration of a short sale goes like this: a house has a mortgage of $400,000 but the current market value of the house is much less than $400,000. Short sale process begins when the homeowner submits a request to the lender to sell the property at a lower price. In order to have a short sale, there must be a sale less than the amount of the mortgage. In our example there is a buyer for house keen to pay $350,000 and the lender accepts the offer. The difference of $50,000 that is short from the mortgage becomes a loss to the lender.

Is there a rationale why I shouldn't do a short sale instead of bankruptcy?

If you are thinking of filing bankruptcy because you can no longer afford the mortgage on the house, then short sale is a chance and you would not have to declare bankruptcy. With the acceptance of the short sale, you can literally walk away with the house at the closing of the sale without a mark to your credit history. Short sale gives you the advantage of credit report free from any flaw and the ability to get rid of a heavy debt. There is a negative side to the short sale of a home. You will be issued a 1099 when the lender books a loss and the short sale transaction is completed. A 1099 form can be think of as a supplementary W2, which is a income that is being reported to the IRS. Going back to the example of the $400,000 house. The lender took a short sale for $350,000 and actually lost $50,000 in the deal. The lender then issue a 1099 for $50,000 to the mortgagee. What this entails is that at the end of the year, from the IRS viewpoint, you effectively had supplementary income of $50K which you will need to pay tax on. As you can see, short sale gives you the ability to walk away from the home without having an infraction on your credit, with the drawback of having to pay for the taxes ultimately. But if you choose to do bankruptcy, you can literally walk away from the house and not have to worry about paying a cent more, with the understanding that your credit will be damaged for the next 10 years.

For more information on the bankruptcy and how bankruptcy affect your home ownership, please visit our website at ToFileBankruptcyOrNot.com.

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