Several personal concerns may prevent people dealing with financial hardship from filing for bankruptcy. Frequently, people worry about judgment from others or a sudden closure of their revolving lines of credit.
Other times, the most pressing concern might be the loss of valuable resources. People who qualify for Chapter 7 bankruptcy sometimes have an obligation to liquidate certain assets. The trustee overseeing the bankruptcy case helps sell certain assets to repay creditors before the courts discharge the remaining balance due.
People who have worked hard to become homeowners and improve the houses where they live may worry about losing their houses. Is a loss of equity inevitable in a Chapter 7 bankruptcy filing?
People can preserve equity
There are bankruptcy exemptions that allow people to keep some of their resources in a Chapter 7 bankruptcy case. There are federal exemptions and different state exemptions available. Alabama does not allow filers to use federal exemptions, so people must use state homestead exemptions to protect their property.
People filing as individuals can protect up to $15,000 of home equity from liquidation in a Chapter 7 bankruptcy filing. Married couples filing together can preserve up to $30,000 in home equity. If they have more equity than that, they may have to refinance and use some of their equity to repay their creditors before they are eligible for a bankruptcy discharge.
What if there is unprotected equity?
Those who have made mortgage payments for years or decades could have far more than the exempt amount of equity accrued. Those people have to make a choice about how to proceed. Depending on the extent of their debt and the collection efforts they face, proceeding with the Chapter 7 filing might be the best option.
Other times, they may want to look into a Chapter 13 bankruptcy. Chapter 13 bankruptcies take much longer to complete and require adherence to a strict payment plan. However, asset liquidation is not necessary in a Chapter 13 filing, making it a beneficial option for those with non-exempt assets.
Discussing personal circumstances can help prospective bankruptcy filers determine if Chapter 7 bankruptcy is the best option. People may be able to preserve their home equity during bankruptcy if they utilize an appropriate strategy.