Ownership of real property while in a bankruptcy case can raise multiple issues:
1. Cure of Mortgage Delinquency. If you are behind on mortgage payments, Chapter 13 is an excellent tool to get back on track and prevent a foreclosure sale. In a Chapter 13 case, the delinquency owing as of the time of filing is paid by the Chapter 13 Trustee over a three to five year time period from the monthly payments that you make to the Trustee, or in some cases, paid at the end of that time period from the sale of the home or a refinance of the mortgage. No interest accrues on the mortgage arrears that are being paid through a chapter 13 case. Of course, during the time that you are in Chapter 13, you are required to continue with regular monthly mortgage payments.
2. Value/Equity in Real Property. The law provides for what are called “exemptions”. What this means is that you are allowed to keep certain property while in bankruptcy up to a particular dollar value. As it relates to real property, the amount of equity (value less any liens against the property) that you are allowed to exempt (“homestead exemption”) depends on whether you choose state or federal exemptions, and whether you file a single or joint (married couple) case. Under federal exemptions (as of April 1, 2022), a single filer can claim up to $27,900 in equity as exempt, and joint filers can claim $55,800. Under Oregon exemptions (as of January 1, 2023), a single filer can claim up to $40,000 in equity as exempt, and joint filers can claim $50,000. Under Washington exemptions, you can exempt equity up to the median value of the home in your county of residence (updated annually).
If you have less than the allowable amount of equity, you are entitled to keep the property so long as you remain current with any mortgage payments. See our article on Reaffirmation Agreements for more details regarding payments to mortgage lenders following a bankruptcy case.
If you have more than the allowable amount of equity in the property, you have a few options so that you can keep your home:
A. File a Chapter 13 case. If you have excess equity in your home and do not want to sell it, and cannot cash out the Trustee as noted below, one of the best options is to file a Chapter 13 case and keep the home. In Chapter 13, you make payments to the Chapter 13 Trustee over three to five years depending on a variety of factors. Over a maximum five-year time period, the unsecured creditors must receive the same amount of money that they would have received had a Chapter 7 Trustee sold your home. You would still have to maintain regular monthly mortgage payments.
B. Pay the Trustee what s/he would receive had the home been sold in a Chapter 7 case. As an example, if the remaining proceeds after the costs of sale, mortgage payoff, and payment of exemption to you would be $10,000, you would have the right to pay $10,000 to the Trustee and keep the home, subject to the continuation of regular monthly mortgage payments. In some circumstances, this can be paid over time to the Trustee.
Alternatively, you can allow the Chapter 7 Trustee to sell your home. After deducting the costs of sale, the payoff on your mortgage, and a payment to you for the amount of your exemption, the Trustee will use the remaining funds to pay down/pay off your creditors. If the creditors are paid in full and there are more proceeds available, the Trustee will pay them to you.
3. Voiding Liens Against Real Property. Some liens against real property can be voided. The most common type of lien that can sometimes be voided is what are called “judicial liens” (i.e., liens that arise by operation of law when a creditor has a judgment against you in the same county where you own real property). If the lien impairs your homestead exemption, you can file a motion to have it voided.
In addition, if the value of your home is less than the payoff on the first mortgage and you have a second mortgage, you can file a motion to void the lien held by the second mortgage holder, but only in a Chapter 13 case. This is called “lien stripping”.