In Colorado, whether you keep your home after filing a chapter 7 bankruptcy depends on three factors – do you want to keep it, are you current on the payments, and do you have any equity?
- First, you need to decide whether you want to keep the house. If you owe far more on it than it’s worth, your interest rates are too high, or if it needs more work than you can afford to put into it, you might be better off letting it go in the bankruptcy and buying again in a few years. In Colorado, almost everyone who wants to keep their home and decides that it makes sense to do so is able to.
- Second, if you file for bankruptcy when you’re behind on the mortgage, your lender may either demand that you get caught up right away or ask the court for permission to start the foreclosure process. This creates some risk and is better not left to the discretion of the mortgager. If you’re behind it would be wise to talk to an experienced bankruptcy attorney to discuss either getting caught up on payments prior to filing the chapter 7, or to consider a chapter 13 bankruptcy which would allow you to repay arrears over a three or five year period.
- Finally, the bankruptcy trustee will be interested in whether you have any equity in the home. That is, is the house worth more than you owe on it? If so, do you have more equity than is protected under your state’s exemption statute (the law that determines what you get to keep in a bankruptcy)? If you don’t have any non-exempt equity, the trustee is not going to be interested in your home. If you do have non-exempt equity, there are steps you can take to minimize it which should be discussed with a knowledgeable chapter 7 bankruptcy attorney in your area.
When considering whether to file for chapter 7 bankruptcy in Colorado, it’s important to remember that all of your dischargeable debts will be wiped out. This includes not just credit card and medical bills, but also the debt you owe on your car and your home. Even though you will no longer owe any money on your home, whether you keep it after filing bankruptcy is largely up to you. The three most common options for your house after bankruptcy are to reaffirm, “stay and pay”, or surrender.
- Reaffirm – Reaffirmation is a process in which someone who has filed bankruptcy asks the judge to waive the discharge of a particular debt. With a mortgage or HELOC, you agree that you will continue to make your payments on the house, and that you continue to owe the debt. As long as you continue to make payments, the lender can’t foreclose. However, if you become unable to pay, not only can the lender foreclose, but they can also sue you for the deficiency (the difference between what you owe on the home, including foreclosure costs and other fees, and what they sell it for at auction). One advantage to signing a reaffirmation agreement is that your continued payments will help you rebuild your credit score more quickly. However, reaffirmation of mortgage debt is generally disfavored by the Bankruptcy Court and bankruptcy lawyers in Colorado.
- Stay and Pay –To “stay and pay” means to continue paying on the debt without reaffirming. Essentially, you are making payments on a debt that you no longer owe. While this option doesn’t technically appear in the Bankruptcy Code, it is still the most common because most lenders are perfectly happy to let you remain in the property as long as you continue to pay them. They will continue to keep track of what you pay, and when you have paid the full amount that was owed before bankruptcy, they will sign the title over to you. You can even sell the property, although a refinance is tricky but not impossible. The primary advantage to not signing a reaffirmation agreement is that if you are no longer able to pay, the lender can foreclose but won’t be able to sue you for the deficiency.
- Surrender – If you don’t want to keep your home, or if the lender is demanding that you sign a reaffirmation but you don’t think it’s in your best interest (for example because you owe far more than it’s worth, or the interest rate is too high), you may simply hand the keys over to the lender and be done with it. The chapter 7 bankruptcy frees you from the debt associated with the home, so you can rent for a few years and buy again when you’re ready without the threat of the lender coming after you.
How assets are treated in bankruptcy can be a complex issue, so it’s always best to contact an experienced Denver bankruptcy lawyer for an analysis of your case.