You can keep your home in Chapter 13 bankruptcy, even with a lot of equity, but nonexempt equity means paying more through your repayment plan.
You can keep your home in Chapter 13 bankruptcy no matter how much equity you have, but if a bankruptcy exemption doesn’t cover it all, you’ll pay the difference to your unsecured creditors through your repayment plan, and many people can’t afford that added payment. Find out how to calculate your home equity, determine whether your equity is exempt, and calculate how much you’ll pay to keep your home in Chapter 13.
Can You Keep Your Home in Chapter 13 Bankruptcy?
You can, if you can afford to. Under what’s called the "best interest of creditors" test, you must pay your creditors at least as much as they would have received in Chapter 7, and when it comes to applying that rule to nonexempt home equity, it can be costly. (11 U.S.C. § 1325(a)(4).)
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Key Factor |
Chapter 7 Bankruptcy |
Chapter 13 Bankruptcy |
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Home Equity Exemption |
You lose a home with nonexempt equity. The trustee can sell it. |
You can keep your home even with nonexempt equity, as long as you can afford to pay creditors the value of the nonexempt portion through your repayment plan. |
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Mortgage Payment Currentness |
You'll want to be current on mortgage payments when filing and remain current after bankruptcy to avoid foreclosure. |
You can catch up on missed mortgage payments through the repayment plan over time, while also staying current on future payments. |
Is Your Home Equity Exempt in Chapter 13 Bankruptcy?
Your home equity is exempt in Chapter 13 bankruptcy only up to the amount covered by your state’s bankruptcy exemptions. Whether you keep or lose that equity comes down to if you can protect, or “exempt,” it. (11 U.S.C. § 522.)
You’ll use a homestead exemption for the equity in your principal residence. The amounts vary significantly by state, so if yours isn’t enough, check whether your state offers a wildcard exemption that covers real estate. Many states allow you to stack the two exemptions to cover more equity. Also, married couples filing jointly can often double the homestead exemption, which can make a real difference if your equity runs high.
How Much Home Equity Do You Have?
Your home equity is the difference between your home's value and the amount that would remain after paying off your mortgage and other liens if you sold it. For instance, if you own your home free and clear, your equity and your home’s value are the same. If your home is “underwater” because your mortgage balance exceeds its value, you don’t have any equity at all. Most filers land somewhere between the two extremes.
Calculating Home Equity Protection in Chapter 13 Bankruptcy
Find your home’s value, subtract what you owe against it, and compare what’s left to your available exemptions.
- Research your home's value. Check websites like Realtor.com and Zillow.com when valuing your home before bankruptcy.
- Subtract the mortgage balance. This would be the amount necessary to pay the first mortgage, any junior mortgages or home equity lines of credit (HELOCs), and any liens, such as tax or HOA liens, in full.
- Find out how much equity you can exempt. The homestead exemption covers equity in a home you live in. The wildcard exemption might cover an additional amount, but not every state offers one, or allows filers to use it for real estate.
- Check federal exemption availability. If your state allows you to use the federal bankruptcy exemptions instead, compare the two systems and choose whichever best protects your assets.
If you can exempt all of your home equity, you won’t pay an extra dime in your Chapter 13 plan. But if you have nonexempt equity, you'll pay at least that amount toward your general unsecured debts—credit cards, medical bills, and the like—through your repayment plan. (11 U.S.C. § 1322.)
Example. Suppose your home is worth $250,000, and you owe $180,000 on your mortgage. Your equity is $70,000. If your state’s homestead exemption covers $50,000, you’re left with $20,000 in nonexempt equity. You’d need to pay your unsecured creditors at least that $20,000 over your three- to five-year Chapter 13 plan to keep the house.
