In talking to people about bankruptcy, I have seen time and again the same erroneous assumptions. One common misconception is that people filing bankruptcy automatically lose their home. Many people assume the judge will strip them of their possessions and their dignity, presumable as a punishment. This notion does not exist in the law but stubbornly persists in society. To rectify this misunderstanding, I will first say the purpose of bankruptcy is to offer a fresh start to people in a financial hardship. The law acknowledges that food, shelter and transportation are necessities of life, and provides limited protection for these assets so people can go forward in life after bankruptcy. But wait, maybe you’ve heard of people that filed bankruptcy and lost their home? Alas, there are threats to homeownership.
The single largest threat to the family home is not bankruptcy, it’s foreclosure. Another misconception is to equate foreclosure and bankruptcy. Foreclosure is the procedure for a lender to take a person’s home if the mortgage payments are not paid; foreclosure is not an issue if the mortgage payments are current. Bankruptcy can forgive credit card debts, payday loans, personal loans, lawsuits and much more. Bankruptcy is also a powerful tool to stop foreclosure and give the homeowner an opportunity to make payment arrangements. Usually when mortgage payments are six to twelve months behind the lender will initiate foreclosure. The California foreclosure laws require notices and waiting periods before a lender can actually sell a home to collect the money owed. Filing bankruptcy can give homeowners a last chance to save their home from foreclosure.
Another threat to the family home is filing chapter 7 (sometimes called straight bankruptcy) if you are “land rich” in the eyes of the law. A person is land rich when the equity in their principal residence exceeds the protection provided by the homestead laws. Filing chapter 7 when a person is land rich can result in the home being sold by the bankruptcy trustee. In 2016 the California homestead laws allow a person to protect realizable equity in their principal residence as follows:
- $75,000 unless a higher exemption applies,
- $100,000 if the person is married or has a dependent, or
- $175,000 if the person is over 65 or has very low income.
Note: realizable equity is the amount you would receive after paying all mortgages, commissions and costs of sale.
In summary, the bankruptcy system will not take your home as a punishment. On the contrary, one of the goals of the law is to protect the family home. If your home is in foreclosure, or if you have substantial equity in your home, you should speak to an attorney and carefully review your options before filing bankruptcy.
At the Law Office of Michael Primus we have helped thousands of clients get out of debt, stop wage garnishments, and start fresh through bankruptcy. If you live in Contra Costa, Alameda or Solano counties and have debt problems, contact us for a free in-office consultation. We have offices in Walnut Creek, Antioch, and Hercules.