As Arizona bankruptcy attorneys, we often come across individuals or families that will hesitate for file for bankruptcy protection even though they are drowning in debt and are living from paycheck to paycheck. And they do this because they fear losing their home as part of the process. Before you file for bankruptcy and decide what type of bankruptcy you want to file, it is important that you understand how a bankruptcy might affect your home ownership.
In an Arizona bankruptcy, secured debts are treated differently than an unsecured debt. A secured debt is one that is secured by property or collateral of some kind. The most common types of secured debts are car loans and home loans. In these case, if you don’t make the payments, the property such as your home will get foreclosed on. When you file for Chapter 7 bankruptcy, it’s important that you continue making the monthly payment on your home if you want to keep it while you are going through the bankruptcy process. If you don’t make the payment, then the bank can ask the bankruptcy court to allow it to initiate the foreclosure process.
You may also be able to save your house by filing Chapter 13 bankruptcy, even if you are behind on the date of filing. For this to work, your income going forward must be enough to allow you to make regular monthly mortgage payments in addition to the Chapter 13 plan payment, which in turn must be sufficient to catch up your arrearage over the next three to five years.
Under Arizona law, the first $150,000 in home equity is protected from the bankruptcy court. This is known as the homestead exemption. For example, if your home is worth $240,000 and you owe $100,000 on the mortgage, then, you have $140,000 in equity. That amount is safe and will not be taken by the bankruptcy court to pay your creditors. This means that the court won’t sell your home and you can continue living there as you were prior to the bankruptcy filing.
However, if you have more than $150,000 in equity, the court may liquidate or sell your home to pay your creditors. You would still be entitled to receive the equity you have in the home first. If you are only slightly over the $150,000 limit, it is unlikely that the court will sell your home since the costs involved in such a sale can be prohibitive. In order to qualify for a homestead exemption in Arizona, the home in question should be your personal residents, the location where you actually live. The home may be a mobile home, condo, town home or a single-family residence.
In the end, the answer may lie in each person’s individual situation. At the Pew Law Center, when our bankruptcy lawyers discuss these issues with clients we look at whether the family can afford the house in which they live and whether it makes financial sense to keep the house and the mortgage that is attached to it. If you are falling behind on your mortgage payments or you think you may fall behind on those payments in the near future, call our experienced Arizona bankruptcy lawyers to obtain more information about your options. Don’t stay away from bankruptcy because of that fear of losing your home.
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