If you file for Chapter 7 bankruptcy, whether you can keep your home depends, in large part, on your state's homestead exemption. If your equity in your home is covered by the homestead exemption, and you are not behind in your mortgage payments, you will be able to keep your home. If not, you will likely lose your home.
Here's how the homestead exemption works.
The Homestead Exemption in Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, you must turn over all nonexempt assets to the bankruptcy trustee who will sell them and divide the proceeds amongst your creditors. In return, most or all of your debts are discharged (wiped out).
Property that is exempt by state or federal law, however, does not go to the trustee -- you get to keep it. That means if your home value is covered by the homestead exemption that applies in your case, you can keep your home.
Each state has its own set of exemption laws (California has two sets). Some states allow bankruptcy filers to use the federal bankruptcy exemptions instead of their state bankruptcy exemptions. To find the applicable bankruptcy exemptions (including the homestead exemption) in your state, check out our Bankruptcy in Your State page. Click on your state link to find an article listing your state's homestead and other exemptions.
Homestead Exemption Amounts
A few states exempt your home to an unlimited value. Most exempt your home equity up to a certain dollar amount. Some states exempt your home based on lot size or acreage. Several states have no homestead exemption at all.
Many states allow married couples filing a joint petition for bankruptcy to claim twice the amount of the listed homestead exemption. This is called "doubling." In addition, some states have a wildcard exemption -- which means they allow debtors to exempt a certain dollar amount of any property. If your state has a wildcard exemption, you may be able to add it to your homestead exemption.
Domicile Rules for the Homestead Exemption
In order to use your state's homestead exemption, you must have acquired your home in the state where you currently live within 40 months prior to filing for bankruptcy. Otherwise, your homestead exemption is capped at $155,675. This cap does not apply if you bought your home with the proceeds from selling another home in that state.
How the Homestead Exemption Works
You must determine if the homestead exemption is large enough to protect the equity in your home. The equity in your home is the difference between your home's value (use current market value) and what you owe to the mortgage holder and all other lienholders. That is, if you were to sell your home, after you paid off the mortgage and lienholders, and subtracted the costs of sale and trustee's commission, would there be anything left over?
If the answer is yes, then the trustee is likely to sell your home and use the proceeds to pay your unsecured creditors. However, the trustee will give you the amount of equity that is covered by your homestead exemption.
If the answer is no, then the trustee will not sell your home.
If you are behind in your mortgage payments and cannot catch up quickly, even if your equity is protected, you are likely to lose your home through foreclosure. Because you can pay off a mortgage arrearage in Chapter 13 bankruptcy, you may be able to save your home by filing for Chapter 13 instead. Learn more about how Chapter 13 Bankruptcy Can Save a Home from Foreclosure.
Filing a Homestead Declaration
Some states require you to record a homestead declaration with your county land records office prior to filing for bankruptcy, in order to claim the homestead exemption. To see if your state requires this, check your state's exemption laws. (To find them, see Bankruptcy in Your State.)
Special Issues to Watch For With Homestead Exemptions
Your homestead exemption will be capped at $155,675 if you have committed certain crimes or engaged in bankruptcy misconduct.
If the bankruptcy trustee is able to eliminate some of the liens on your home, it may free up enough equity to tip the scale -- making it worthwhile to sell your home and distribute the proceeds to your creditors. If you think some of the liens on your home might not have been recorded correctly, check with a local bankruptcy attorney.