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. While this is a possibility, the answer depends on a few critical factors.
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 some 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).
Exceptions to the Automatic Stay in Chapter 7 Bankruptcies in Pennsylvania
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 be “granted relief” from the automatic stay with permission from the bankruptcy court. If a creditor moves for relief from the stay, you will be notified and are entitled to attend the hearing where you may argue your case with help from your legal representative.
A mortgage company or lender might file for relief from the automatic stay for various reasons. If a homeowner is behind on their mortgage payments, is in a foreclosure action, or their home is scheduled for a sheriff sale, filing Chapter 7 will stop all legal action against the property. However, while the automatic stay will stop a creditor from foreclosing on a house, it might only be temporary if the homeowner filed Chapter 7.
There is a significant difference between Chapter 7 and Chapter 13 bankruptcies. When a debtor files Chapter 13, they are required to submit a bankruptcy plan that proposes payments to their creditors. Often, a Chapter 13 is explicitly filed to pay back mortgage arrears when a homeowner is delinquent in their mortgage payments or facing foreclosure.
A Chapter 7 bankruptcy has no mechanism or means to cure a mortgage default. Therefore, while the automatic stay goes into effect and stops any pending foreclosure or sheriff sale, the bankruptcy itself does not address the mortgage arrears. If you filed Chapter 7 to stop a foreclosure, you are only buying time.
If a delinquency exists, a mortgage lender will typically file a motion for relief from the automatic stay in a Chapter 7 case soon after filing date. Because there is no means to cure the default in Chapter 7, the court will usually hold in favor of the lender.
If your ultimate goal is to save a home that is in foreclosure, our experienced Philadelphia bankruptcy attorneys will likely advise you to file Chapter 13.
Your Home and Chapter 7 Bankruptcies in Pennsylvania
Chapter 7 is designed for people with limited financial resources and assets. A person’s home is usually their most valuable asset, though a mortgage generally encumbers it. How the house will be treated in a Chapter 7 bankruptcy depends on the value of the property and the remaining mortgage balance, if any.
Mortgage Balance and Chapter 7 Bankruptcies
First, if the mortgage balance is higher than the fair market value of your home, the property is said to be “underwater.” This means that you have no equity in your house. While this sounds bad from an investment point of view, it does make things much easier in bankruptcy.
All property you own is considered part of the “bankruptcy estate” and is available to a trustee to liquidate to pay your creditors. The Bankruptcy Code provides a number of protections, or exemptions, that allow you to keep possession of most, if not all, of your property. When you file Chapter 7, our Pennsylvania bankruptcy attorney will review all of your assets along with the exemptions that protect them. If your house has no monetary value because the mortgage balance is more than the property is worth, no exemption is required.
If the value of your home is more than the mortgage owed, then things get more complicated. The federal homestead exemption for a residential property is $25,150. This is the amount of equity you can protect in Chapter 7. For example, say your home is worth $120,000 and your current mortgage balance at the time of filing is $100,000, leaving you $20,000 worth of equity. In this scenario, the exemption protects your home, so you can likely file Chapter 7.
What if the value is more than $120,000? For instance, say the value of your home is $150,000 and the remaining mortgage is still $100,000. Now the equity in the house is more than the exemption. In this situation, you would most likely be required to file Chapter 13.
Tenants in the Entirety in Chapter 7
Pennsylvania has a specific exemption for homes owned by married couples. When you own a home jointly with your spouse, it will typically be deeded as “tenants in the entirety.” Under this exemption, the property is protected from any creditor if only one spouse owes the debt. That last part is very important when filing Chapter 7.
To understand how the concept of “tenants in the entirety” affects a Chapter 7 bankruptcy, imagine an older married couple who have paid their mortgage paid off but owe a significant amount of credit card and medical debt. They are on a fixed income, cannot pay all of their monthly bills, and are considering filing Chapter 7.
Is their house safe? The answer depends on one factor: who owes what debt. Under these circumstances, the federal homestead exemption provides this couple no help. If they used the federal exemption, the trustee would sell their home to pay their creditors. However, the Pennsylvania exemption could be beneficial. If none of the debt is shared, then the house is protected from any collection action from the individual creditors. Unfortunately, if the couple had any joint liabilities or shared a credit card, this exemption would not be available for that particular debt.
Federal vs. Pennsylvania Exemptions in Chapter 7
Another drawback is that when you file for bankruptcy, you must choose between the federal and the Pennsylvania exemptions. You cannot mix and match them. Overall, the federal exemptions afford a debtor greater protections. However, if your house has substantial equity, the Pennsylvania exemptions might be more beneficial.
When preparing to file Chapter 7 or Chapter 13, it is critical to have an accurate appraisal of the value of your home, an idea of your current mortgage balance, and a detailed accounting of all of the debt you owe. Our experienced Pennsylvania Chapter 7 bankruptcy attorneys will thoroughly review all of your information to assist you in filing for the chapter of bankruptcy that is right for your situation.
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.