Chapter 13 Bankruptcy: What If I Have a Lot of Equity in My Home?
Find out what happens if you file for Chapter 13 bankruptcy and you have lots of home equity.
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If you have a lot of equity in your home, filing for Chapter 13 bankruptcy can allow you to keep your home and reorganize your debts. But if you can’t exempt all of your equity, you may have to pay back a significant portion of your unsecured debts through your repayment plan. Read on to learn more about how the equity in your home can affect your Chapter 13 bankruptcy.
For more information on what happens to your home or mortgage in Chapter 13 bankruptcy, see our topic area onYour Home in Chapter 13 Bankruptcy.
What Is Home Equity?
Home equity is the difference between the value of your home and the amount of loans or liens encumbering the property. If you own your home free and clear, your equity is essentially what your home is worth. But if your mortgage balance exceeds your home’s value, it means that you don’t have any equity in your home.
For more information on how to calculate your equity, see What Is Equity in Property?
Is Your Home Equity Exempt?
The equity in your home is an asset in bankruptcy just like any of your other property. How your property is treated in bankruptcy depends on:
- whether it is exempt, and
- whether you filed for Chapter 7 or Chapter 13 bankruptcy.
Each state (and the federal system) has a set of exemptions that allow you to protect a certain amount of property in bankruptcy. In most cases, you will use a homestead exemption to exempt the equity in your principal residence. But keep in mind that the amount of your homestead exemption can vary greatly depending on which state you live in.
In Chapter 7 bankruptcy, the bankruptcy trustee appointed to administer your case has the power to sell your home if you can’t exempt all of your equity. But in Chapter 13 bankruptcy, you can keep your home in exchange for paying back a portion of your other debts (discussed below).
To learn more about the homestead exemption as well as other bankruptcy exemptions, and to find out the amount of homestead exemption in your state, see our Bankruptcy Exemptions topic.
Can You Keep Your Home in Chapter 13 Bankruptcy?
Unlike a Chapter 7, Chapter 13 bankruptcy allows debtors to keep all of their property (including their nonexempt assets) in exchange for paying back some or all of their debts through a repayment plan. This means that if you have a lot of nonexempt equity in your home, reorganizing your debts in Chapter 13 bankruptcy will typically be a better option for you than filing for Chapter 7 bankruptcy.
For more information on how you can keep your property in Chapter 13 bankruptcy, see Will Chapter 13 Debt Reorganization Allow Me to Keep My Property?
What Happens to Your Home Equity in Chapter 13 Bankruptcy?
If you can exempt all of the equity in your home, it will not affect your Chapter 13 bankruptcy. If you have any nonexempt equity, you can still keep your home in Chapter 13 bankruptcy. However, you will need to pay back more of your general unsecured debts (such as credit cards and medical bills) through your repayment plan.
When you file for Chapter 13 bankruptcy, you must comply with something called the best interest of creditors test. To satisfy the best interest of creditors test, you must pay your unsecured creditors at least an amount equal to what they would have been entitled to receive in a Chapter 7 bankruptcy. Because a Chapter 7 trustee could have sold your home and used your nonexempt equity to pay back your debts, you must pay that amount to your unsecured creditors through your Chapter 13 repayment plan in exchange for keeping your home.
To learn more about how the Chapter 13 repayment plan works and how to calculate your plan payment, see our topic area on The Chapter 13 Repayment Plan.