Whether Chapter 7 bankruptcy makes sense when you own a home depends on your goals -- do you want to save your house, delay foreclosure, or just walk away with less debt? Most Chapter 7 bankruptcy filers can keep their homes as long as they are current on their mortgage payments. A few lose their home if they have significant equity that can be used by the trustee to pay unsecured creditors. For those planning on walking away from the home, Chapter 7 bankruptcy can delay foreclosure for a short period of time. (To learn about the basics of Chapter 7 bankruptcy, see Nolo's article A Chapter 7 Bankruptcy Overview.)

Read on to learn more about what will happen to your home in a Chapter 7 bankruptcy.

Can I Keep My Home?

You will be able to keep your home in Chapter 7 bankruptcy if you have no equity in the house or you are able to exempt (protect) whatever equity you do have in your home, using the homestead exemption (discussed below). If this is the case, the bankruptcy trustee cannot sell your home to pay unsecured creditors because there would be no money to distribute.

However, it is important to distinguish between losing your home in bankruptcy (which happens when the bankruptcy trustee sells your home to pay unsecured creditors) and losing your home outside of bankruptcy (that is, through the normal foreclosure process). If you are behind on your mortgage payments, you will eventually lose your home in foreclosure outside of the bankruptcy process, even though the bankruptcy trustee does not sell your home as part of the bankruptcy.

If You Are Behind on Your Mortgage

If you file for Chapter 7 bankruptcy and want to keep your home, you must keep making your mortgage payments. In most cases, the bankruptcy trustee will not sell your home (see "Will You Lose Your Home in Bankruptcy?", below), but once the bankruptcy is complete, the normal foreclosure process will proceed. (Or, if the lender is able to lift bankruptcy's automatic stay--discussed below--the foreclosure process could start before the bankruptcy is over.) That would mean that you'd lose your home outside of the bankruptcy process, through foreclosure.

If you have a mortgage arrearage and want to save your home, consider Chapter 13 bankruptcy, which can allow you to pay off the arrearage through the bankruptcy. (To learn how Chapter 13 bankruptcy affects your home, see Your Home in Chapter 13 Bankruptcy.)

Will You Lose Your Home in Bankruptcy?

Even if you are current on your mortgage payments and can continue to make them in the future, you may still lose your home if the bankruptcy trustee is allowed to sell it. If you have significant nonexempt equity in your home, the Chapter 7 bankruptcy trustee may attempt to sell your home in order to pay off some of your unsecured debt. However, most Chapter 7 bankruptcy debtors don't have enough nonexempt equity to trigger a sale, which means most debtors can keep their homes in bankruptcy. To determine if the bankruptcy trustee is likely to sell your home, go through this two-step process:

Step One: Determine the Amount of Your Homestead Exemption. The laws of most states allows homeowners to protect a certain amount of the equity in their home from creditors -- this is called the homestead exemption. To figure out the amount of your homestead exemption, you must determine which set of exemptions apply to you. There is a federal homestead exemption (which can be used only in some states), and most states have a homestead exemption amount (usually based on dollar value, but some states limit the amount of acres you can protect from creditors). Which exemption you can use depends on where and when you bought the home, whether the state where you are filing allows use of the federal exemptions, and whether you have moved within the last few years. To learn the details of the homestead exemption amounts, consult with an attorney or a good self-help bankruptcy book. (For information on bankruptcy attorneys and books, see "Getting Help" at the end of this article).

Step Two: Is There Enough Unprotected Equity In Your Home to Trigger a Sale? Next you must determine if you have enough nonexempt equity (equity not protected by the homestead exemption) in your home to trigger a sale in bankruptcy. Start with the market value of your home and subtract the following:

• the amount of homestead exemption you are entitled to claim (usually between $10,000 and $100,000)
• the trustee's commission on the difference (25% of the first $5,000, 10% of the next $50,000, and 5% of the rest, up to one million)
• the costs of sale (usually around 8% of the market value)
• the amount owed on all mortgages, and
• the amount of all nonmortgage liens secured by the home (such as a tax lien).

If you end up with a negative number, you do not have sufficient equity to trigger a sale. This essentially means that the Chapter 7 bankruptcy trustee will have no incentive to sell your home, since there won't be anything leftover to be used to pay the unsecured creditors. 

If you end up with a positive number, this is the amount of equity that the bankruptcy trustee could use to pay your unsecured creditors. In this case, the Chapter 7 bankruptcy trustee may sell your home, give you the amount of the homestead exemption, pay off mortgage and lien holders, and use the rest to pay off unsecured creditors.

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