If you file for Chapter 7 bankruptcy, whether you can keep your home depends largely on two things:
- the amount of your homestead exemption, and
- how much equity you have in your home.
Bankruptcy Court Can Administer Your Home Because It Is Property of the Estate
The moment you file for Chapter 7, a bankruptcy estate is created. Almost all of your assets, including your home, become part of the bankruptcy estate. The court has the power to administer all property of the estate in your case. This means the Chapter 7 bankruptcy trustee is authorized to sell your nonexempt assets and distribute the proceeds to your creditors. (Learn more about how Chapter 7 bankruptcy works, including how the trustee administers your estate.)
The Trustee Will Not Sell Your Home If It Has No Equity
The Chapter 7 trustee’s job is to liquidate your nonexempt property to pay your general unsecured creditors. Your mortgage lender is usually a secured creditor with a lien on your house. This lien is not wiped out by your Chapter 7 bankruptcy and must be paid off first if your home is sold.
If the balance of your mortgage exceeds the value of your home, then you have no equity. If the trustee sold the house, there would be no proceeds left to distribute to unsecured creditors after the mortgage lender is paid. This means that if your home has no equity, the trustee will abandon (not liquidate) it.
The Homestead Exemption May Save Your Home If It Has Equity
If your home has equity, the trustee has the power to sell it unless you can exempt that equity. The federal bankruptcy exemptions and most states have a homestead exemption that can be used to exempt the equity in your home (keep in mind that this must be your principal residence). If you can exempt the equity in your home, the trustee cannot sell it. However, the amount of your homestead exemption depends on the exemption laws of your state. (Find the amount of the homestead exemption in your state.)
Example. Mary owns a house worth $200,000. She has a $150,000 mortgage securing the property. This means she has $50,000 of equity in her home. If her state’s homestead exemption is $50,000 or higher, then she can fully exempt all of her equity and keep her home.
What If Your Homestead Exemption Doesn’t Cover All of Your Equity?
If you have more equity than you can exempt with your homestead exemption, you may still be able to keep your home. If your state has a wildcard exemption, you may be able to add it on top of your homestead exemption to cover the difference. Unfortunately, in most states the wildcard exemption may be reduced significantly if you are using all of your allowed homestead exemption.
However, the trustee may still abandon your home even if it has a small amount or nonexempt equity. The trustee incurs costs to sell your home and gets a commission from the sale. If the amount of nonexempt equity is not enough to cover these costs, there will be nothing left to distribute to creditors. In that case, your home will not be worth selling. Also, keep in mind that if the trustee sells your home, he or she must pay you an amount equal to your exempt equity. (To learn more, see Will the Trustee Abandon My Home in Chapter 7 Bankruptcy?)
Continue to Make Mortgage Payments If You Want to Keep Your Home
When you receive a Chapter 7 discharge, your personal liability on the mortgage is wiped out. This means that the mortgage lender cannot come after you personally if you don’t pay your mortgage. However, as we discussed, the lender still has a lien on your house which does not get wiped out by your discharge. As a result, the lender still has a right to take the house back through foreclosure if you don’t make your mortgage payments. So if you wish to keep your home, continue making your mortgage payments during and after your Chapter 7.
To learn more about what happens to your house if you file for Chapter 7 bankruptcy, see Your Home in Chapter 7 Bankruptcy.)