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There are a number of disturbing myths that people keep repeating about bankruptcy, and many of them are highly negative and inaccurate. The idea that someone will lose all of their property in bankruptcy is one of them, and this myth keeps people struggling with serious levels of unsecured debt from getting the relief and protection they deserve.

Chapter 7 bankruptcy exists so that people at or below the state median income can discharge their unsecured debts and work toward financial freedom. People also call Chapter 7 bankruptcy liquidation bankruptcy because the courts can sometimes order the person filing bankruptcy to liquidate or sell certain assets in order to repay creditors.

If you own a house, it’s only natural to worry that bankruptcy could affect your homeownership. However, bankruptcy is meant to help you rebuild, not leave you totally impoverished. The state does allow you to exempt or protect a certain amount of home equity, as well as certain other assets so that you can maintain a basic standard of living during and after bankruptcy.

How much home value has protection during bankruptcy?

States allow differing home equity exemptions. States set limits based on factors such as average income and home values across the state. Under the current Connecticut statute, an individual filing for bankruptcy can theoretically protect up to $75,000 worth of accumulated equity.

Any amount over that could wind up liquidated. The courts might order you to refinance and use some of that home equity to repay creditors prior to your discharge.

Bankruptcy could make it easier for you to keep your home

When you find yourself drowning in debt, whether it’s slowly accumulated credit card debt or medical debt from an unexpected condition, it can be hard to balance your budget and pay all of your bills on time. Missing a mortgage payment could eventually mean a threat to your homeownership.

Reducing your total debt burden and freeing up more of your monthly income to cover the most critical of expenses, including your mortgage, can be one of the biggest benefits of Chapter 7 bankruptcy. In other words, a bankruptcy filing could potentially protect your status as a homeowner, as opposed to endangering it.