Can I Keep My Home & Get Rid of Liability Using Chapter 7?

Dave Johnson, Riverside, Illinois: Chapter 7

Dave earns $5,000 a month and is an associate attorney at a family law firm located in Chicago. He is married and has one child. Dave's wife is a stay-at-home mother and does not work outside the home. Dave and his wife own a house in Riverside, Illinois, a suburb located in Cook County. Unlike many home owners, Dave's home is not underwater - he purchased it in 1999 and has always been current on his mortgage. His home has $50,000 in equity. In 2005, Dave was in a car accident.

As a result of the accident, both of Dave's legs were broken in several places, requiring two surgeries to repair them. Dave also underwent eighteen months of physical therapy. Although Dave's savings covered his living expenses while he was in the hospital, his insurance did not cover all of the cost of his surgeries or his physical therapy. Dave still owes $45,000 in medical bills. He also has amassed $25,000 in credit card debt, much of which was used to pay for his physical therapy. Dave and his wife own their cars free and clear, but both have high mileage and are worth less than $2,000 each. Like Sam, Dave is likely to pass the means test.

Although it is possible that the Chapter 7 trustee could object to Dave's Chapter 7 filing as abusive, Dave's expenses and overall financial picture indicate that his case is likely to survive that challenge. Because the majority of Dave's assets are protected by his exemptions and those of his wife, it is unlikely that the trustee will seek to liquidate his assets. Additionally, although Dave cannot exempt the entire value of his home's equity, his $15,000 exemption and the closing costs associated with a property sale will likely make his home unattractive to the Chapter 7 trustee, whose goal is to quickly liquidate assets to repay creditors.

A Chapter 7 filing will allow Dave to discharge his medical bills and credit card debt. It will also sever his personal liability on his home loan. So long as Dave continues to make his mortgage payments on time, his home is secure. If Dave is ever forced to default on his mortgage, and his home enters foreclosure, he will not be liable for a deficiency judgment. If the home is sold for less than the loan balance, Dave will not have to repay the difference.