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You may file Chapter 13 if you don't own a home

There is apparently a myth spreading both in Massachusetts and in other parts of the country that a person should not file a Chapter 13 bankruptcy unless they have equity in a home. The other side of this myth is that if a person does own a home, they must file a Chapter 13 and cannot file Chapter 7.

As noted in previous posts, in a Chapter 7 bankruptcy a debtor usually receives a discharge from most debts, provided that the debtor surrenders "non-exempt" property. A debtor is allowed to "exempt" certain property and keep it after the bankruptcy.

In a Chapter 13 bankruptcy, a debtor ordinarily will keep all property, but must devote a regular portion of monthly income to one payment toward most or all debts. On completing this payment plan, a debtor receives a discharge even if they did not pay the balance of the debts.

Qualifying for a Chapter 13 or a Chapter 7 has little to do with home ownership. A person who owns a home legally may file under either chapter. Someone who owns a home might choose to file a Chapter 13 bankruptcy for many reasons. For starters, unlike a Chapter 7, a Chapter 13 can prevent foreclosure and allow a debtor to catch up on back mortgage payments over time. Also, if a debtor has a lot of equity in their home, that equity might not qualify as "exempt" property. This means that if that debtor wants a fresh financial start, that person may have to sell the home and turn over all or part of the home's equity.

On the other hand, someone who does not have equity in a home may have good financial reasons to file Chapter 13 and take advantage of the manageable payments that type of bankruptcy affords. The most important thing a person needs to file Chapter 13 is a regular stream of income - the debtor need not own a home.

Source: Fox Business, "Can you file Ch. 13 if you own a home?," Justin Harelik, March 5, 2013

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