You can file bankruptcy any time you wish, but it may or may not help you. If you buy a second house and then file for bankruptcy, you most likely will not be able to keep the second house. If you file under Chapter 7 of the Bankruptcy Code, the house will probably be sold to cover your debts; whereas, if you file under Chapter 13, the court can make you sell the house as part of your repayment plan. If you cannot afford the house, bankruptcy can help you get out from under the mortgage or a foreclosure.
Bankruptcy
Individuals file for bankruptcy in a bankruptcy court with the help of an attorney and a court trustee. Individuals can file for one of two types of bankruptcy: Chapter 7 or 13. In Chapter 7, the trustee sells all nonexempt property, which would include the second home, distributes the money to creditors and the court erases your debts. In Chapter 13, you, the trustee and the creditors establish a repayment plan that is within your means.
Exempt Property
Bankruptcy law recognizes that most people need some basic amenities to get back on their feet after bankruptcy and, as a result, allows filers to keep one car, equity in a home up to a certain value, clothes and furniture and retirement accounts. The exact amount of property that a person can keep depends on the state he lives in. If a person files under Chapter 7, the trustee cannot sell any exempt property. No state allows a person filing for Chapter 7 bankruptcy to keep a second home.
Chapter 13
Chapter 13 allows you to reorganize your debts and generally does not involve repossession or asset liquidation. However, bankruptcy attorney Kevin Gipson, writing for the Bankruptcy Law Network, states that creditors must get out of a Chapter 13 plan at least what they would get if assets were liquidated in Chapter 7. Gipson states that to keep the second house, you must be able to give your creditors a monthly payment high enough to keep them from asking the trustee to sell the second house. Exactly what constitutes sufficient depends on your creditors, the trustee and the value of the second house.
Bottom Line
As a U.S. citizen, resident or property owner, you are entitled to file for bankruptcy as a form of debt protection whenever you want. No law prevents you from buying a second home and immediately filing for bankruptcy. However, do not file for bankruptcy and expect to keep the second home. Furthermore, filing for bankruptcy has serious consequences -- for starters, it stays on your credit report for 10 years -- and should not be taken lightly.
Tags: file bankruptcy, keep second, second home, Chapter trustee, second house
