Will you lose your home as part of a Chapter 7 bankruptcy?

Bankruptcy can help those struggling financially relatively quickly. It can be a powerful debt solution that stops aggressive collection activity and even discharges the amounts you owe on unsecured debts. Despite these benefits, many people enduring financial hardship try to avoid bankruptcy.

While filing for bankruptcy might benefit them, they have heard so many frightening stories about what bankruptcy does that they never look into it for themselves. One of the most pervasive myths about Chapter 7 or liquidation bankruptcy is that it takes everything someone owns when they file.

While there is a requirement to liquidate some of your property, you can exempt some of your assets from those requirements. Someone who meets the other criteria for a Chapter 7 bankruptcy in Alabama can receive a discharge of their debts while also protecting some of the equity in their home. 

How much home value can you protect?

There are state and federal exemptions from bankruptcy. Alabama does not allow people to use either the state or federal exemptions. They can only use the state exemptions.

If you file for Chapter 7 bankruptcy in Alabama using state exemptions, you can currently protect up to $15,000 in home equity. Looking at how much you have paid toward the principal balance of your mortgage can help you decide if Chapter 7 is the right solution for you.

If you have more than $15,000 in equity, you may need to refinance the property and use the excess equity to repay some of your unsecured creditors. The homestead exemption also limits the size of the property. Any acreage over 160 acres may be vulnerable in bankruptcy as well.

What if you have too much home equity?

If you have $30,000 in combined credit card and medical debt by more than $100,000 in home equity, you lose more money through the liquidation process than you would save by discharging your debts. In such a scenario, a Chapter 13 bankruptcy might be a better option. While it does require a lengthy repayment plan, it eliminates the requirement to liquidate any of your assets.

Learning more about Chapter 7 bankruptcy will help you feel confident as you consider filing.

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