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. Once you've learned how the homestead exemption protects home equity in bankruptcy, check out the resources provided at the end of the article. You'll find links to applicable bankruptcy forms and additional articles we think you'll enjoy.
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.
If you can cover all of your home equity with the homestead exemption that applies in your case, and you're current on your mortgage, you can keep your home.
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 the Chapter 7 trustee sells your house, the trustee will return the exemption amount to you. Creditors receive the amount remaining after the trustee deducts sales costs and the trustee's fee.
Chapter 7 bankruptcy doesn't have an option that helps filers save a home. If you want to keep your home, it's essential to ensure you can protect all of your home equity with a homestead exemption, or a wildcard exemption, if available. Also, be sure you're current on your mortgage payment.
You could lose your home in these situations in Chapter 7:
Debtors facing a home loss in Chapter 7 can often save a home by catching up on their mortgage payment in Chapter 13 using the Chapter 13 repayment plan.
You use the homestead exemption in Chapter 13 the same way as in Chapter 7—it protects a particular amount of equity in your home. But what happens when you have nonexempt equity is different in Chapter 13.
Unlike the Chapter 7 trustee, the Chapter 13 trustee doesn't sell property. But even so, your creditors are still entitled to an amount equal to your nonexempt equity. Here's how this is accomplished in Chapter 13.
In your Chapter 13 plan, you'll pay "unsecured creditors" or those creditors whose debt isn't guaranteed by collateral, an amount equal to your nonexempt home equity minus what it would cost to sell the property.
The problem for many people with significant equity is that this rule drives up the cost of a payment plan to an amount they can't afford. If you find yourself in this situation, you might not qualify for Chapter 13 bankruptcy.
The homestead exemption amount you can use to protect your home will be the same regardless of whether you use it in Chapter 7 or 13. However, suppose the homestead exemption doesn't cover all of your equity. These examples illustrate what you can expect.
In Chapter 7, the trustee will sell a house with unprotected equity for the benefit of creditors.
Example 1. Marta's home is worth $600,000, and she owes $550,000, leaving $50,000 in equity. Her state's homestead exemption is $75,000. Because it covers all of her home equity and her mortgage payment is current, she will keep her house.
Example 2. Roland's home is worth $600,000, and he owes $550,000, leaving $50,000 in equity. Like Marta, Roland's state's homestead exemption is $75,000. However, unlike Marta, he's behind on his mortgage payment. The trustee won't sell the house because Roland can protect all the equity with a bankruptcy exemption. But his lender might ask the court to lift the automatic stay so the lender can pursue foreclosure. Or the lender might wait until the case is over before foreclosing.
Example 3. Eric has $230,000 of equity in a home worth $500,000, and he can protect $100,000 using his state's homestead exemption. Because Eric can't protect all of the home's equity with a homestead exemption, the trustee will sell the home. Once sold, the trustee will give Eric the exemption amount of $100,000. The trustee will pay creditors the amount remaining after deducting sales costs and the trustee's fee.
In Chapter 13, you keep your house because the trustee doesn't sell property. However, paying for everything required in the Chapter 13 plan isn't easy. You must earn enough to pay the value of any equity the homestead exemption doesn't cover, plus your monthly mortgage payment, all late payments, with interest, and the trustee's fee.
Example 1. Shauna can cover all of her home's equity with the homestead exemption. She has no late payments and can afford to continue paying her monthly mortgage and the other amounts required in Chapter 13. The bankruptcy court will "confirm" or approve her plan, and she'll keep her home.
Example 2. Alex has $160,000 in equity and can protect $100,000 with his state's homestead exemption. He will need to pay $1,000 per month for the nonexempt equity through his five-year Chapter 13 plan, plus other required amounts ($1,000 x 60 months = $60,000).
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.
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 cannot 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 to benefit 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.)
Each state has its own set of exemption laws. Some states allow bankruptcy filers to use federal bankruptcy exemptions instead of state bankruptcy exemptions. You'll choose the set that works best for you.
Here's where you'll find the bankruptcy exemptions that apply to you, including the homestead exemption. Scroll to the middle of the article and click on your state link to find an article listing your state's homestead and other exemptions. If your state isn't listed, you'll find your state in Nolo's state exemption articles.
Below you'll find issues you'll likely want to discuss with a bankruptcy lawyer.
Remember that if you are behind on your mortgage payments when you file for Chapter 7, you'll likely 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.
Because you can pay off a mortgage arrearage in Chapter 13 bankruptcy, you might be able to save your home by filing for Chapter 13 instead. Learn more about how Chapter 13 bankruptcy can save your house.
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.
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.
Did a friend or family member provide financing for your home? If so, you'll want to check whether they properly recorded a lien against your property. The lien is important because it gives the lender the right to recover the property. If a lien isn't in place, the trustee will disregard the lender's collateral claim against the property which will increase in your equity.
If with the additional amount, your equity exceeds the homestead and wildcard exemptions, the trustee will sell the property in Chapter 7 or require you to pay more in Chapter 13. If you think some of the liens on your home might not have been recorded correctly, check with a local bankruptcy attorney.
Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.
Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.
More Bankruptcy Information
Bankruptcy Forms and Document Checklist
More You Might Like
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 hiring a local bankruptcy lawyer.
Updated November 7, 2022