Bankruptcy Won't Take Your Home.
The biggest fear people express to me is that they will lose their home and car if they file for Bankruptcy. That fear is fairly common and might be preventing a lot of people from utilizing the Bankruptcy system and getting relief from their debts. So will you lose your home?
In almost all situations, No.
Depending on your financial scenario, you might be filing for either a Chapter 13 plan or Chapter 7 liquidation. Briefly, in a Chapter 13 bankruptcy, the entire goal is to pay a pre-determined amount of money and cure your old debts. For that reason property is not taken, sold, or lost in a Chapter 13 Bankruptcy: the focus is on income and expenses. You won't lose your home or car, etc.
In a Chapter 7, the focus is more on your assets and things. A Chapter 7 involves the analysis of debts and assets to see if you have anything in excess to sell. Anything sold would go towards your debts, but if you don't have anything to sell, the debts generally get discharged anyways. This is what is referred to as a "Zero-Asset Case."
Thankfully there are a variety of exemptions you can claim that protect certain assets, including your home equity, car, jewelry, furniture or others. These exemptions are different depending on whether you select the Federal Bankruptcy Exemptions or Connecticut Bankruptcy Exemptions when you file. Make sure you know what benefits each option has.
Assuming you have a mortgage, you can "reaffirm" or simply promise to keep paying that mortgage after the Bankruptcy. That means the encumbered part of your home is safe from the Bankruptcy Trustee. The issues arise when you have too much equity.
If you have a home worth $500,000, with a Mortgage balance of $400,000, that leaves $100,000 in equity left over that is potentially exposed to the Bankruptcy Trustee. Prior to October of 2021, the Connecticut Homestead Exemption only protected up to $75,000, meaning you might have had some issues protecting that remaining $25,000 in equity.
In the State of Connecticut, the Homestead Exemption was increased in October of 2021 to reflect an exemption of $250,000 per person. That means that when you file for Chapter 7 Bankruptcy, you can reaffirm your mortgage(s) and then protect up to $250,000 of equity that remains. If you and your spouse file a joint Chapter 7 Bankruptcy, you even get to double that amount to protect $250,000 for each of you for a total of $500,000 in equity.
The bottom line is that your home has a lot of protection under Connecticut's Homestead Exemption. This only applies to your main residence, and not for vacation or investment properties, however. Your home, however, is generally pretty safe in Bankruptcy.
You should make sure you have hired a well-versed Bankruptcy Attorney who has a good handle on debt reaffirmations, protecting your assets, and strategy regarding what set of exemptions to use.
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