Home ownership is an achievement that is important in American culture, and signifies that the purchaser is hardworking and financially stable. Unfortunately, financial situations can change in an instant if someone loses a job, gets into a serious accident, or must care for an ailing family member. When money becomes an issue, and unpaid bills keep mounting, one option to regain control of a person’s financial situation is to file for bankruptcy. This legal process allows debtors filing under Chapter 7 to erase certain debts and get creditors off their backs. However, one big and legitimate concern of many seeking Chapter 7 protection is what happens to the debtor’s home?

Chapter 7 is a liquidation process, meaning assets that are not exempt from bankruptcy will be sold and the proceeds used to pay outstanding creditors. Each state has its own rules on the homestead exemption for bankruptcy debtors, which control when a home could be subject to bankruptcy liquidation via a forced sale. If a home is already in foreclosure, does this affect the bankruptcy process? The application of the homestead exemption in Indiana and the implications of foreclosure during bankruptcy will be discussed below.

Losing a Home

As a preliminary point, there are two ways a person can lose possession of his or her home – one inside bankruptcy and the other outside bankruptcy. One can lose a home through the bankruptcy process if the homestead exemption does not apply, allowing the trustee to seize the property for liquidation. Outside of bankruptcy, the homeowner could lose the home to foreclosure if he or she falls behind on the mortgage payments and is unable to negotiate a modification or refinance.

Homestead Exemption in Indiana

The homestead exemption specifically refers to the amount of equity in a home the state will allow a debtor to retain before the bankruptcy trustee would have the right to seize it for liquidation. In Indiana, the homestead exemption amount is $19,300 for individual debtors and $38,600 for married couples filing jointly. Thus, if the debtor’s home has no equity, or the equity is below the exemption amount, this asset will be exempt from liquidation to pay unsecured creditors, and the debtor keeps the home. Figuring out if a debtor has equity in excess of the exemption requires an analysis of the following factors. First, determine the fair market value of the home, and then subtract the following costs:

• The homestead exemption ($19,300 or $38,600);
• The amount owed on the mortgage;
• Any liens on the property, such as unpaid taxes;
• The cost of selling the home (about seven percent of the sale price); and
• The bankruptcy trustee’s commission (the amount paid to the trustee for his/her services), which is on sliding scale and tied to the amount of money distributed to creditors. It ranges from 25% for disbursements of $5,000 or less to 3% on disbursements of $1 million or more.

If this analysis results in a negative number, the debtor’s home is safe from bankruptcy. If, on the other hand, the number is positive, the trustee is permitted to sell the home and divide the proceeds.

Foreclosure and Bankruptcy

It is important to understand that bankruptcy will not stop a foreclosure. It can delay the foreclosure process, but cannot halt the process entirely. First, the automatic stay will temporarily suspend the lender’s efforts to foreclose, but the lender is likely to request the court lift the stay before the bankruptcy is complete, which is likely to be granted if the lender can show the debtor does not have the means to make the required payments. However, bankruptcy may allow a debtor to redirect money previously used to pay other creditors towards the mortgage lender. Finally, if the home is ultimately lost in foreclosure, and there is still money owed after the foreclosure sale, the debtor is not responsible for taxes that might be owed on this deficiency.

Get Help

If you have overwhelming debt, explore your legal options. Bankruptcy can give you a fresh start, and alleviate the stress of creditor harassment. Attorney Christopher L. Arrington helps individuals in central Indiana with financial difficulties file Chapter 7 bankruptcies so they can regain their lives. If you live in Danville or the surrounding area, call the office today to schedule an appointment.