Will I Lose My Home If I File Chapter 7 Bankruptcy in Pennsylvania?

Bankruptcy has developed a nasty reputation which is largely based on myths and misinformation.  One of the most persistent (and harmful) bankruptcy myths is that you will automatically lose your home if you file for Chapter 7.  On the contrary, not only is this almost never the case, but filing for Chapter 7 can actually help you protect your home against foreclosure.  In this blog post, our Pennsylvania bankruptcy attorneys explain some of the outcomes for what can happen to your house when you file for Chapter 7 in Pennsylvania.

How Bankruptcy’s Automatic Stay Protects Against Foreclosure

It’s ironic that bankruptcy is associated with foreclosure because a core component of bankruptcy called the automatic stay actually protects filers against foreclosure.  So what is the automatic stay, and how does it work?

The federal judiciary supplies the following definition of the automatic stay:

An injunction [i.e. court order] that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.

It may sound too good to be true, but there’s a very specific reason for the automatic stay to exist.  Its purpose is to give debtors a temporary grace period of “breathing room,” so that they can get their financial affairs in order while the bankruptcy case is in progress.  Without the benefits afforded by the automatic stay, ceaseless collection actions could undermine cases by continually interfering with the debtor’s ability to get a fresh start. Creditor harassment is also prohibited by the Fair Debt Collection Practices Act (FDCPA).

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While the stay offers robust legal protection, Chapter 7 debtors should be advised that in some situations, it is possible for creditors to remove or “lift” the automatic stay with permission from the bankruptcy court.  If a creditor intends to have the stay lifted, you will be notified and are entitled to attend the hearing where you may argue your case with help from your legal representative.

In order to lift or obtain relief from the stay, the creditor must file a motion, at which point he or she assumes the “burden of proof.”  This means the court will make a presumption in favor of the stay (and therefore, in favor of the debtor), while the creditor must demonstrate that there is strong legal justification for granting of relief from the stay.

What Happens to Your House When You File for Chapter 7 Bankruptcy?

Chapter 7 lacks the repayment plan featured in Chapter 13 bankruptcy.  As a result, Chapter 7 debtors can potentially lose nonexempt property which is part of the bankruptcy estate, while the state or federal exemptions may be used to protect property which is considered exempt.

While the state of Pennsylvania does not offer a homestead exemption, you may be able to protect equity in your home if you and your spouse own the property “as a tenancy by the entirety,” which simply means you and your spouse own your house jointly as a couple, rather than as separate individuals.  If this is the case, creditors cannot seize the house from both of you in order to satisfy debts which are held by only one spouse.

In other situations, it may be the case that you simply do not have enough unprotected equity in your home to justify a sale. Conversely, if your equity is too great (or if you are behind on payments which you would like to make up), you may be required to file for Chapter 13.  Keep in mind that Chapter 7 is reserved only for debtors who exhibit the greatest degree of financial need.

While the state of Pennsylvania does not have a homestead exemption, you may use the federal homestead exemption instead. If you use the federal homestead exemption, you may protect up to $22,975 of home equity.  However, it’s important to remember that you cannot mix and match the state and federal exemptions. If you opt to use the federal homestead exemption, you must use the other federal exemptions as well.  Here are some examples of how these exemption sets compare:

  • Insurance
    • Federal — $12,250 in the loan value of a life insurance policy
    • PA — Up to $100 per month
  • Motor Vehicle
    • Federal — $3,675
    • PA — None
  • “Wildcard” (Miscellaneous)
    • Federal — $1,225, plus $11,500 from an unused homestead exemption (maximum $12,725)
    • PA — $300

Generally speaking, the federal exemptions are more extensive and protective than those permitted by the state of Pennsylvania.

Pennsylvania Bankruptcy Attorneys Offering Free Consultations

If you’re considering filing for Chapter 7 in Pennsylvania, it’s important to work with an experienced attorney who can help you navigate the legal process, handle your financial paperwork, and negotiate with your creditors.  To arrange for a completely free and confidential case evaluation with the bankruptcy lawyers of Young, Marr & Associates, call our law offices at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania today.

Have You:

Been paying credit card balances that seem to never go down?

Lost your job and are now having trouble keeping up?

Attempted to work out a payment arrangement to no avail?

Been notified of a mortgage foreclosure action?

Been denied for a mortgage or other line of credit?

If the answer to any of these questions is “yes” then bankruptcy may be an option that you should consider.

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