Should You Sell Your Home In a Bankruptcy To Pay Off Debt?

Trying to get out of debt can be really overwhelming, especially if you’re having a difficult time making minimum payments. Skilled bankruptcy attorneys can help you assess all your debt relief options, including alternatives to selling your home. Selling your home to get on top of your debt may seem like an efficient way to pay down debt. That said, selling your home to get out of debt is an indicator of a larger problem and is often used as a last resort. Before you go off listing your home for sale, here are some things to consider.

Home Equity in a Chapter 7 Bankruptcy

Losing a home in a Chapter 7 bankruptcy, for some, can surprisingly bring a sense of relief and freedom. While it’s never easy to part with a place filled with memories, for those who don’t mind, it can provide a fresh start unburdened by overwhelming debt. There’s a realization that the house, once a source of stress, now becomes a gateway to a new chapter of financial stability. 

If Chapter 7 bankruptcy is considered as a way to relieve your debt stress,  it’s important to understand what is the income limit for filing a Chapter 7 bankruptcy.

What kind of debt do you have?

With medical debt, pesonal or business acquisition loans, refinancing can help you stay on top of payments.. You may consider credit card consolidation or debt consolidation. However, if you have a mountain of credit card debt that is an indicator of a huge spending problem that selling your home won’t fix. Having credit card debt is often a sign that you have a problem with overspending to the point that you cannot manage it. Until you can change your habits selling your home cannot fix this problem. 

The kind of debt that you owe matters especially if selling off your home seems like a good way to get on top of debt. If you have student loan debt, medical debt, or debt from a personal loan your best option is to find a way to refinance. Specifically with student loan debt, having an income-based repayment option can help you free up your budget so that selling your home isn’t necessary.

How much of your home do you own?

If you own less than 20% of your home then you shouldn’t sell your home. Depending on how much money you owe on your house, it can be beneficial to sell. For example, a couple that has owned their home for 30 years is likely to be nearly down paying off a 30-year mortgage, selling their home may be something to consider since they may not need their home. That couple has a few options–perhaps selling their home and downsizing or refinancing their mortgage to help pay down their debts. The amount of home that you own matters when considering selling your home to pay off debt.

You may consider speaking to an attorney about bankruptcy if you owe too much debt and your equity amount is less than the bankruptcy exemption for your state, meaning that the equity is covered in a bankruptcy. 

What are your monthly mortgage payments like?

This is something to consider if you made the mistake of buying “too much house.” What I mean by that is if you spent the upper limit on what you qualify for when buying a home, you may not have enough room left in your budget to keep on top of your mortgage statements. Generally speaking, your monthly mortgage statement should be less than 25% of your monthly income. If your monthly mortgage statement is taking up half or more of your monthly income, you need to scale back on your home. It’s possible that refinancing on your mortgage can help free up some room in the budget, but if you have other debts outside your mortgage that need to be tackled then you need more cushion in your budget to help you get on top of your debt payments. 

Are you considering moving?

If you are already considering moving to another city or state for job purposes or what have you, then selling your home may be the best option to tackle debt. Dave Ramsey states that moving is one of the reasons that you may consider selling your house to pay off debt.

Especially if there is a move involved, selling your home may already be necessary to make the move possible. Once you’ve settled into your new city and a new job, you may want to consider renting and tackling your debt before outright buying a new home. If you are still new in your field, buying a home after a major career switch might not be ideal (at least initially) because you don’t know exactly where you will settle down. If you’re committed to living in any area for 7 years or more, then you can consider buying a home in that city. However, if you see your career taking you to a new city or state within 5 years or less, then hold off on buying a home altogether. Buying a home is a long-term investment. If you’re considering this, you might want to consult with a real estate agent Eugene to better understand the market and make an informed decision.

In general, I would say that selling your home is not an ideal way to pay off debt. However, there are certain circumstances where selling your home is a viable option to get on top of your debt. That varies based on the kind of debt you have, the amount of home you own, and your own life circumstances. Paying down debt can be rough, we know, so do what you can to modify your spending habits and refinance where you can.