The short answer is no. The bankruptcy court will not make you give up your house if you file for bankruptcy. If there is little or no equity in your home at the time that you are thinking about filing for bankruptcy, then you can safely file a chapter 7 bankruptcy case. The chapter 7 bankruptcy trustee is only interested in assets with equity that cannot be exempted. No equity means the house is all yours. Of course, you have to continue paying your mortgage if you do not want the bank to foreclose on the home.
However, if you live in Virginia and have significant equity in your home it may mean that your option will be to file a chapter 13 bankruptcy due to something in bankruptcy known as the “liquidation test.”
And what is the liquidation test? It is a mathematical formula used by the bankruptcy courts whereby the more equity you have in your home, the more you will be expected to pay into the chapter 13 plan. The principle behind the liquidation test is that the total amount you pay in a Chapter 13 bankruptcy plan needs to be at least as much as you would have paid had you filed for chapter 7 bankruptcy. As a reminder, in a chapter 7, you must surrender all of your non-exempt assets. Your equity in your home is your primary asset.
So to use sophisticated legal jargon here, what the bankruptcy law is saying in this situation is: Hey buddy, if you have been paying your mortgage for a number of years and are sitting on $100,000 in equity don’t go thinking that you can purposefully file for chapter 13 and pay only say, $10,000 during the next 5 years instead of the $40,000 you owe to your creditors. Had you filed for a chapter 7 bankruptcy your unsecured creditors would have received the full $40,000.00 owed to them since the chapter 7 trustee would have had the right to sell your home and pay your creditors. As such, $40,000 is what the court will expect from you to contribute into the chapter 13 plan during the next five years.
So what is the lesson here? Well, for those seeking to file bankruptcy in Virginia, having equity in your home is a disadvantage, to put it mildly! The significant equity in your home may mean that a chapter 13 bankruptcy is your only bankruptcy option.
NOTE: If you do not have a ton of equity in your home you can always file a chapter 7 case in order to test the waters and see if the chapter 7 trustee “will bite.” If it turns out that there is in fact significant equity in your home and the trustee has made it clear that he is interested in liquidating your home, then you can convert your case to a chapter 13. Hope for the best but prepare for the worst is how to look at it.