I Own My Home Free and Clear. Will That Affect My Chapter 13 Bankruptcy?

If you have no mortgage, you still get to keep your home in Chapter 13 bankruptcy. But you may have to pay more to your unsecured creditors.

If you own your home free and clear, you still get to keep it in Chapter 13 bankruptcy. However, you may have to pay a higher dividend to your general unsecured creditors through your repayment plan. This is because the amount you are required to pay unsecured creditors depends, in part, on the following:

  • the amount of equity in your home, and
  • whether that equity is exempt.

You Can Keep Your Home in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is designed to let you keep your assets and reorganize your debts through a repayment plan. In Chapter 7 bankruptcy, the trustee can liquidate your nonexempt property to pay your creditors. However, in Chapter 13, you can keep your home even if it is not fully exempt. (For more details on how Chapter 13 works, see Chapter 13 Bankruptcy.)

Nonexempt Property Increases How Much Unsecured Creditors Get Paid

In return for keeping all of your property, you must pay general unsecured creditors (such as credit card companies) at least an amount equal to the value of your nonexempt assets through your plan (also keep in mind that you may still be required to pay more based on your income and expenses). This is fair because unsecured creditors would have received this amount if you had filed for Chapter 7 instead.

This means that if you can’t exempt all of your home equity, you may have to pay a significant dividend to your unsecured creditors (discussed below).

Determining the Amount of Your Home Equity

The amount of your equity is essentially the value of your home minus the balance of your mortgages or other liens encumbering the property. If you own your home free and clear, it is simply the value of the house. As a result, if you own an expensive home free and clear, you may be required to pay back all or a significant portion of your unsecured debts in your Chapter 13 bankruptcy. (Learn how to value your home in bankruptcy.)

Exempting Your Home Equity

If you can exempt the entire value of your home, then you don’t need to pay more to your unsecured creditors just because you own your house free and clear. Since a Chapter 7 trustee could not have sold a fully exempt house, a Chapter 13 trustee can’t force you to pay more to unsecured creditors.

To determine whether you can exempt all of your equity, check your state’s exemption laws (and the federal bankruptcy exemptions if your state allows you to choose between state and federal exemptions). Most states offer debtors a homestead exemption they can use to exempt a certain amount of equity in their principal residence. However, the amount of your homestead exemption depends on your state. (Find your state's homestead exemption here, and learn more about bankruptcy exemptions in our Bankruptcy Exemptions area.)

Example. Mark and Jane own their home free and clear. Their home is valued at $150,000. If their state has a homestead exemption of $150,000 (or greater), they can exempt the entire value of the house. As a result, they don’t need to pay an additional amount to unsecured creditors simply because they own the home free and clear. If Mark and Jane’s homestead exemption was $125,000, they would have to pay at least $25,000 (the amount of nonexempt equity) to unsecured creditors.

To learn more about issues affecting your home and mortgage in Chapter 13 bankruptcy, see Your Home in Chapter 13 Bankruptcy.

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