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Chapter 7 and the homestead exemption

Due to the large amount of misinformation that exists on the Internet, and the complexity of the process itself, consumers are often replete with questions and concerns about the bankruptcy process. One very common misunderstanding that many people have is that homeowners filing for bankruptcy must file for Chapter 13. This, however, is not true. In fact, many Tennessee homeowners considering bankruptcy will be happy to learn that most homeowners are actually eligible to file for Chapter 7 bankruptcy.

Chapter 7 bankruptcy is by far the most common, and often the more preferred form of bankruptcy in the United States. One reason that many individuals prefer filing for Chapter 7 bankruptcy, rather than Chapter 13, is that Chapter 7 bankruptcy allows consumers to wipe out most, if not all, of their debt, giving them a fresh financial start. Alternative forms of bankruptcy, such as Chapter 13, require those filing to enter into repayment plans that must be abided by for years before the debt can be exhausted.

This is also why many filers believe that homeowners must file for Chapter 13. In Chapter 7 bankruptcy the debtor typically liquidates their assets to pay creditors what they can before their debt is removed. Whereas, with Chapter 13 bankruptcy a debtor enters into a repayment plan for a period of time before the debt goes away, allowing the debtor to retain their assets. While the equity in the family home is something the court will consider, it is possible for the debtor to retain their home, even in Chapter 7.

For one thing, in cases where homeowners have already exhausted the equity in their home, or have little to no equity to begin with, the person will have no problem saving the home, since the there is nothing to liquidate. Further, if the homeowner has remained current on their mortgage payments, there is no reason for the bank to foreclose. Even when there is equity, however, certain bankruptcy exemptions, including the homestead exemption, protect home equity up to a certain dollar amount.

Source: Fox Business, "Can You File Ch. 13 if You Own a Home?," Justin Harelik, March 5, 2013.

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

Toll Free: 888-376-0282
Phone: 423-933-1606
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