If you are considering filing bankruptcy and own a home in New Jersey, you have cause to be worried. This article explains how your home will be treated in your Chapter 7 or Chapter 13 bankruptcy case, what actions you can take, and what rights you have.
Don’t file bankruptcy before reviewing this information! And if you have further questions, do not hesitate to consult an experienced New Jersey bankruptcy lawyer.
Your Home Will be Seized and Sold if You Do Not Properly Apply Exemptions
When you file bankruptcy, “exemptions” protect your property from seizure by the Trustee (this is the person who manages your bankruptcy). When declaring bankruptcy in NJ, you have the choice of whether to apply for federal or state exemptions.
Under the federal exemption scheme and as of this writing, you can protect up to $22,975 of equity in your home – double that if you are married and filing bankruptcy jointly. The NJ exemption scheme has no exemption for your real property (meaning your house).
If you have equity in your home and wish to keep your home, you might consider selecting the federal exemptions, but keep in mind that you cannot mix and match. If the NJ exemptions would be beneficial to you in some other aspect of your financial situation, you have to weigh the potential benefits and losses of both systems.
What to Do If You Have Too Much Equity in Your Home in NJ
What if you have more equity than you can protect? Let’s take a look at a couple of examples.
Example #1: Let’s say you and your spouse are considering bankruptcy due to medical debt. You have your home of 25 years appraised and find that it is worth $380,000, and since you refinanced about ten years ago you have a first mortgage with a balance of $260,000.
You have $120,000 in equity and can only exempt $45,950 of it. The Trustee will assuredly be interested in seizing your home if you file bankruptcy. In this example, a skilled bankruptcy attorney will advise you as to bankruptcy and non-bankruptcy alternatives to dealing with the medical debt.
Example #2: Same house as above, but you also have a second mortgage of $53,000, which you took out to help your youngest through college.
Okay, let’s do the math. You are entitled to exempt $45,950 of equity. You have $67,000 in equity. That leaves $21,050 unprotected.
The Trustee will consider seizing your home. First, they will subtract 5% for the cost of sale, which is $16,000. It may not be worth it for the Trustee to seize and sell your home, so they may propose that you pay your creditors the amount they would get if your home were seized and sold. You can pay that $16,000 over the life of your Chapter 13 plan.
If your medical bills were more than $16,000, this might be a good deal. If not, you might have to reconsider your options.
You Can Stop Foreclosure by Filing Bankruptcy in NJ
Once you file a bankruptcy petition, the “automatic stay” is in immediate effect. It “stays” or stops any creditor action against you, including:
- Collection letters
- Collection phone calls
- Wage garnishment
- Bank account levy
- Judgment liens
Foreclosure lawsuits are stayed pending the closure of your case. Regardless of whether you wish to retain or surrender your home, no foreclosure judgment may be entered, your home cannot be sold, and you cannot be evicted during your bankruptcy case unless the creditor files a motion to lift the automatic stay and the court grants that motion.
Getting a Mortgage Modification in Bankruptcy in NJ
In New Jersey, when you file a bankruptcy petition and you are in arrears on your mortgage, you can avail yourself of the NJ Foreclosure Mediation Program to try to save your home. Through this program, you can negotiate with the lender to deal with past-due mortgage payments and fines and fees and perhaps modify the terms of your mortgage to make it more affordable.
You Can Catch Up with Mortgage Payments in a New Jersey Chapter 13 Bankruptcy
When you file a Chapter 13 case in New Jersey, you will propose a three or five-year repayment plan in which you can catch up with past-due:
- Child support payments
- Spousal support or alimony payments
- Government fines or fees
- Income taxes
- Student loan payments
- Car payments
- Mortgage payments
Chapter 13 is for people with a steady income stream who have fallen behind in payments but have the means to resume making regular payments as well as a payment each month to the Chapter 13 Trustee to fund their plan.
When the plan is fully funded, you are caught up with any and all arrears, and your unsecured debt, such as credit cards and medical bills, is discharged.
You Can “Strip Off” a Second Mortgage or HELOC in a NJ Chapter 13 Bankruptcy
If your home is worth less than you owe on a first mortgage and you have a second mortgage or HELOC, you can “strip off” that second mortgage or home equity line of credit and have it discharged like any other unsecured debt.
Be advised that mortgage lenders often challenge your appraisal, claiming that your home is worth more in an attempt to prevent the strip-off. Your bankruptcy lawyer will help you prepare a convincing case that your home is worth what you say it is.
You Can Surrender Your Home to the Lender in an NJ Bankruptcy
If you simply cannot afford to keep your home, you can get out from under that mortgage debt and walk away free and clear by filing Chapter 7 bankruptcy in New Jersey. By selecting the “surrender” option with regard to your real property, you are giving the property to the lender, and the underlying debt will be discharged.
When the lender eventually sells your home at the sheriff’s sale, they will apply the proceeds of the sale to your account. There will likely be a deficiency balance, however, you are not responsible for paying it because it was discharged in your bankruptcy case.
Consult with an Experienced NJ Bankruptcy Attorney if You Have Questions
As you’ve read, there are many ways you can deal with your home and mortgage debt in bankruptcy in New Jersey. The most important thing is to be informed as to the value of your home, the amount you owe in mortgages or HELOC, and your current ability to pay or repay mortgage debt.
When you have this information, you can weigh your options. Be sure to consult with an NJ bankruptcy lawyer if you feel unsure about which is the best option for you.