Many people in Pennsylvania and around the country put off filing for bankruptcy because they are worried about losing their homes. This sometimes occurs in a Chapter 7 bankruptcy, but it does not happen very often. This is because federal or state exemptions protect a certain amount of home equity in a personal bankruptcy, and most people exhaust options like home equity loans before they seek relief from overwhelming debts. If you have an unmanageable financial situation and a lot of home equity, you may be able to keep your home, catch up on your mortgage and pay off some of your other debts by filing a Chapter 13 instead of a Chapter 7 bankruptcy.
State and federal homestead exemptions
When individuals or couples file Chapter 7 bankruptcies, some of their assets are protected from their creditors. All states have bankruptcy exemptions, but Pennsylvania is one of the few that does not offer a homestead exemption. This means that you will have to use the federal homestead exemption if you file a Chapter 7 bankruptcy in Pennsylvania and want to protect your home equity. The current federal homestead exemption was increased to $27,900 in April 2022, but you can double that figure if you file a joint bankruptcy with your spouse.
Chapter 13 bankruptcies
If you have overwhelming debts and more home equity than the federal homestead exemption will protect, you can file a Chapter 13 bankruptcy if you are worried about losing your home. If you do, you will make payments to your creditors for either three or five years. When you have made all of your payments, most of your remaining debts should be discharged. However, you will still have to make your mortgage payments because the Chapter 13 discharge will not remove the lien on your home.
Bankruptcy offers a second chance
The bankruptcy exemptions in Pennsylvania may not be as generous as the exemptions in other states, but they were not drafted to punish people who find themselves unable to pay their bills. If you own a home in Pennsylvania and file a Chapter 7 bankruptcy, the federal homestead exemption will protect up to $27,900 of your home equity. You can protect up to $55,800 in home equity if you file a joint Chapter 7 petition with your spouse. If the federal homestead exemption does not protect all of your home equity, you can still seek debt relief and keep your home by filing a Chapter 13 bankruptcy petition.