It is well known that there are two kinds of personal bankruptcy in the United States: Chapter 7 and Chapter 13. However, it is not necessarily a choice which one that you will file. It is your income that determines whether you file a Chapter 7 or a Chapter 13. In the event that you are lower-income, it is highly likely that you will file a Chapter 7 bankruptcy.
Another name for the Chapter 7 bankruptcy is a “liquidation” bankruptcy. This means that you may need to liquidate some of your assets to pay off your creditors as much as possible. Many people worried that they will lose their homes during a Chapter 7 bankruptcy. According to FindLaw, whether or not you lose your home during a Chapter 7 bankruptcy largely depends on the equity in your house.
Why does this only apply to Chapter 7?
While a Chapter 7 bankruptcy is a liquidation bankruptcy, a Chapter 13 bankruptcy is not. Chapter 13 bankruptcies are “reorganization” bankruptcies, where the debtor agrees to a payment plan to pay back his or her creditors. With a Chapter 13 bankruptcy, the debtor does not lose any of his or her assets so long as he or she continues to pay on the plan.
What is equity?
Equity is the difference between the current market value on the home and any mortgages or home equity loans. For most people that file Chapter 7, this number is negative. If the equity in your home is negative, you will be able to keep your house so long as you can continue to afford to pay your mortgage.