Chapter 7 Bankruptcy and Foreclosure

If you are filing for Chapter 7 bankruptcy, whether you can keep your home depends on several factors:

1. Are you behind in your mortgage payments?
2. Are you already in foreclosure proceedings?
3. Do you have equity in your home, and if so, how much?
4. What is the homestead exemption amount available to you?  

Keeping Your Home If You Are Current on Mortgage Payments: The Homestead Exemption

If you are not behind in your mortgage payments, then whether you get to keep your home depends on how much equity you have in your house and whether that equity amount is within the allowed exemption amount for your state. This is because in Chapter 7 bankruptcy, the trustee can take your nonexempt property and sell it to pay your unsecured creditors. If you have equity in your home that is not exempt under the bankruptcy laws, the trustee is entitled to sell your home.

Here’s how to figure out if you can keep your home or if the trustee will sell it.

Step One: Determine Your Equity. The first step is figuring out how much equity you have in your home. To do this, subtract the amount you owe on all of your mortgages and home equity loans from the current market value of your home. The result is the amount of equity you have in your home. (If you get a negative number, you don’t have any equity.) For example, if your house is worth $200,000 and you have $185,000 worth of mortgage loans still owed, your equity would be $15,000.

Step Two: Find Your Homestead Exemption. Next, determine the amount of homestead exemption available to you. Each state has a set of exemptions available in bankruptcy. Most states exempt at least some of your home equity (this is called the homestead exemption). Some states allow you to choose between the state exemptions and a set of federal bankruptcy exemptions. To learn more, see Chapter 7 Homestead Exemption.

Step Three: Compare Your Equity to Your Homestead Exemption. If your homestead exemption is greater than your equity, you will probably be able to keep your home. If, however, your homestead exemption is less than your equity, you may be at risk of losing your home. You might still be able to keep it in certain circumstances, including but not limited to:

• You can apply other exemption amounts to your home (like a wildcard exemption).
• You can pay the difference between the exemption amount and the equity you have from sources other than your bankruptcy estate. The trustee may accept this money (and use it to pay your creditors), rather than sell your home.
• If the cost of selling your home would eat up all of the nonexempt equity, the trustee is unlikely to sell your home (since nothing would be left to pay your unsecured creditors).

If You Are Behind in Mortgage Payments

If you are already in foreclosure, or behind in mortgage payments, Chapter 7 bankruptcy does not provide a way for you to catch up on the arrears. Although the automatic stay will delay the foreclosure for a period of time, it won’t stop the foreclosure in the end. (To learn more about the automatic stay, see Saving Your Home From Foreclosure With Bankruptcy.)

However, if you make up the missed payments or work something out with your mortgage lender so that you are no longer in default, you may be able to save your home.

Other Ways Chapter 7 Can Help With Foreclosure

Chapter 7 bankruptcy might be able to help you in other ways.

Eliminate or reduce unsecured debts.  Filing bankruptcy allows you to eliminate or reduced unsecured debts, such as credit card bills and medical bills.  This can free up cash which you can use to make your mortgage payments. 

Delay in foreclosure proceedings. The bankruptcy will delay the foreclosure for a few months, which will allow you to put those mortgage payments you aren’t making into the bank. This can help you move when it’s time to get out of your home.

Chapter 13 Bankruptcy and Foreclosure

If Chapter 7 won’t help you save your home, you might want to consider Chapter 13 bankruptcy. Chapter 13 allows debtors to catch up on mortgage arrears through the repayment plan. To learn how Chapter 13 can help with foreclosure, see Using Chapter 13 Bankruptcy to Avoid Foreclosure.