Updated March 18, 2019
If you file for Chapter 7 bankruptcy, whether you can keep your home will depend on several factors, including your state's homestead exemption. If you can protect all of the equity in your home with the homestead exemption, and you aren’t behind on your mortgage payments, you should be able to keep your home. If you can’t meet one or both of these requirements, you’ll likely lose your home.
Here's how the homestead exemption works.
In Chapter 7 bankruptcy, you must turn over all of the property you can’t protect with an exemption—called nonexempt assets—to the Chapter 7 bankruptcy trustee. The trustee will sell them and divide the proceeds amongst your creditors. In return, you’ll receive a discharge of your dischargeable debt, such as credit card balances, past-due utility bills, and medical bills.
Property that is exempt by state or federal law, however, doesn’t go to the trustee—you get to keep it. If 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.
Each state has its own set of exemption laws. Some states allow bankruptcy filers to use the federal bankruptcy exemptions instead of their state bankruptcy exemptions. California exemption law lets you choose between two sets.
To find the applicable bankruptcy exemptions, including the homestead exemption, in your state, check out Bankruptcy in Your State. Click on your state link to find an article listing your state's homestead and other exemptions.
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.
Some 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 that allows debtors to exempt a certain dollar amount of any property. If your state has a wildcard exemption, you might be able to add it to your homestead exemption, although some state wildcard exemptions don’t extend it to real estate.
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 $170,350 ($160,375 for cases filed between April 1, 2016, and March 31, 2019). (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. 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.
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.)
If you have committed certain crimes or engaged in bankruptcy misconduct, your homestead exemption will be capped at $170,350 ($160,375 for cases filed between April 1, 2016, and March 31, 2019). (11 U.S.C. sec. 522(q).)
If the bankruptcy trustee is able to eliminate some of the liens on your home, it might free up enough equity to tip the scale and 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.