If you file for Chapter 7 bankruptcy, whether you can keep your home will depend on several factors, including your state's homestead exemption. You should be able to save your home if:
If you can't meet one or both of these requirements, you'll likely lose your home. Here's how the homestead exemption works.
You get to keep property that a state or federal law says is "exempt" from creditors in bankruptcy. A homestead exemption protects equity in the house in which you reside.
In Chapter 7 bankruptcy, you must turn over all of the property you can't protect with an exemption or "nonexempt assets" to the chapter 7 bankruptcy trustee. The trustee sells nonexempt assets and divides the proceeds amongst your creditors.
If all of your home equity is covered by the homestead exemption that applies in your case, and you're current on your mortgage, you can keep your home. However, you could lose your home in these situations in Chapter 7:
Each state has its own set of exemption laws. Some states allow bankruptcy filers to use the federal bankruptcy exemptions instead of state bankruptcy exemptions.
To find the bankruptcy exemptions that apply to you, including the homestead exemption, check out Bankruptcy in Your State. Click on your state link to find an article listing your state's homestead and other exemptions.
Homestead exemption statutes vary widely by state. A few states allow you to keep your home no matter its worth, but most exempt your home equity up to a certain dollar amount. You might find your state has lot size or acreage limitations, or perhaps no homestead exemption.
Many states allow married couples filing a joint bankruptcy petition to "double" or claim twice the amount of the listed homestead exemption. You can double the exemption amount when both spouses have an ownership interest in the property.
If the homestead exemption doesn't cover all of your equity, check for a wildcard exemption that allows debtors to exempt a specific dollar amount of any property. You'll likely be able to stack the wildcard exemption on your homestead exemption, although some state wildcard exemptions don't apply to real estate.
To use your state's homestead exemption, you must have acquired your home in the state where you currently live within 40 months before filing for bankruptcy. Otherwise, your homestead exemption is capped at $189,050 (for cases filed between April 1, 2022, and March 31, 2025). (11 U.S.C. sec. 522(q).) This cap doesn't apply if you bought your home with the proceeds from selling another home in that state.
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. So if you sold your home, the amount remaining after paying off the mortgage and liens would be your equity.
You're not allowed to deduct sales costs and the trustee's fee for selling a house when declaring your equity in your bankruptcy paperwork. Still, the trustee will consider those amounts when determining whether anything would be left over for creditors if the trustee sold the house.
Suppose enough equity remains to make it worthwhile for the trustee to sell your home for the benefit of your unsecured creditors. In that case, the trustee will return the equity amount covered by your homestead exemption to you. (A debt is unsecured if it isn't backed by collateral. Common examples are credit card debt and medical bills.)
Remember that if you are behind on your mortgage payments when you file for Chapter 7, you're likely to lose your home even if your equity is protected. Why? Because mortgage liens don't go away in Chapter 7.
If you don't pay what you owe, the lender can ask the bankruptcy court to lift the automatic stay and allow the lender to foreclose. Or the lender can wait to foreclose after your Chapter 7 bankruptcy is over.
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.
Some states require you to record a homestead declaration with your county land records office before filing for bankruptcy to claim the homestead exemption. To see if your state requires this condition, check your state's exemption laws.
If you have committed certain crimes or engaged in bankruptcy misconduct, your homestead exemption will be capped at $189,050 (for cases filed between April 1, 2022, and March 31, 2025). (11 U.S.C. sec. 522(q).)
If the bankruptcy trustee can eliminate some of the liens on your home, it might 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.
Bankruptcy is an unusual area because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.
One way to keep track of your research is to use the bankruptcy forms as an outline. You'll find links to the exemption-related bankruptcy forms and other exemption resources in the chart below. You can also look at the list of Chapter 7 and 13 bankruptcy forms to see where this topic fits in the bankruptcy scheme. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.
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We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.
Updated April 11, 2022