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Chapter 7 bankruptcy and the homestead exemption

There is a lot of anxiety associated with filling for bankruptcy. Much of this stems from the fact that people know so little about the process. Like most things in life, however, this fear is often misplaced. Tennessee homeowners struggling with debt and considering bankruptcy might find the following information on the family home and Chapter 7 bankruptcy interesting.

As has been discussed in the past, Chapter 7 bankruptcy is a form of liquidation bankruptcy. Unlike Chapter 13, another popular choice, Chapter 7 allows debtors to erase all forms of debt that are legally expugnable. Some debts, such as student loans, are not dischargeable. Chapter 7 bankruptcy also means that debtors do not have to enter into a repayment plan.

In addition to certain debt that is not expugnable, there is also certain property that is exempt from liquidation, such as pensions, clothing, motor vehicles, and some of the equity in the family home. Unlike filing for Chapter 13, which will permanently abate a foreclosure proceeding, in Chapter 7 the debtor must still remain current on their mortgage payments.

The homestead exemption protects debtors from the forced sale of their home by creditors. The rules vary dramatically from state to state, and there are federal equity limits as well. In general, however, if a homeowner has equity in their home the creditor cannot force the sale of the home in order to re-pay the debt, but only if the equity is below a certain limit.

Unlike Chapter 13, filing for Chapter 7 will not stop a foreclosure. The homestead exemption only protects homes from the forced sale by creditors. It does not necessarily apply to the forced sale of the home to satisfy a default in the mortgage. That means to retain the family home the debtor must remain current on their mortgage payments to retain their home.

Source: Fox Business, "Protect Home by Filing Chapter 7?" Justin Harelik, Nov. 20, 2012

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Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

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