Can I File for Bankruptcy If I Have Equity in My Home?

Having equity in your house won't prevent you from filing bankruptcy, but you could be in danger of losing the house if you can't protect or "exempt" it. What will happen to your equity will depend on:

• the bankruptcy chapter you file, and
• how long you've owned the home.

The exemption system you're entitled to use will also come into play. Read on to learn more about protecting the equity in your house when filing for bankruptcy.

Home Equity and the Type of Bankruptcy You File

The two bankruptcy chapters, Chapters 7 and 13, offer different benefits, but both allow you to "exempt" or protect the same amount of equity in your home. What happens to any nonexempt equity, or the amount you can't protect, will depend on the chapter you file.

Home Equity in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, the trustee assigned to your case will review your paperwork to determine if you have any nonexempt property. If so, you'll be required to turn it over so it can be sold to pay off some of your debt. Here's how it works:

• The trustee will sell your home and pay all mortgages, liens, taxes, expenses of the sale, and your exemption amount. Then, the trustee will take a commission as payment. The remaining funds will be distributed to creditors.
• If the house won't generate enough money to provide a worthwhile distribution to your creditors, the trustee might not bother to sell it.
• If the trustee demands turnover of the house, you might be able to substitute cash or other exempt property equivalent to the amount the trustee would get from the sale.

If you'd like to keep a homestead with nonexempt equity, you'll probably be better off pursuing a Chapter 13 bankruptcy.

Home Equity and Chapter 13 Bankruptcy

Instead of handing over your house or other nonexempt property to a Chapter 7 trustee, you can keep the property in this chapter. It's not free, however. You'll pay your creditors the nonexempt amount as part of your three- to five-year monthly payment.

This system works well for everyone involved. Creditors will receive as much as they would have in a Chapter 7 case, and you'll preserve the equity in the house.

How Much Equity Can You Protect?

In every bankruptcy case, you can claim some property as exempt. You won't have to give it up to a bankruptcy trustee who will use it to pay your creditors' claims. State law defines the types and value of the property you can exempt.

Some states give you a choice between the state exemptions or the federal exemption scheme. Start by learning the exemption options provided to you by your state.

Most states allow an exemption for equity in your "homestead" or primary residence. If you own other real property, you'll only be able to exempt the equity in the other properties if there is a specific exemption under state or federal law that would cover it (and there usually isn't).

To determine which scheme you're entitled to use and whether you're subject to an equity cap, you'll want to ask yourself a few questions.

Have You Moved Recently?

If you've moved to a new state within the last two years, you won't be able to apply for the new state's exemptions. Instead, you'll have to use the homestead exemption allowed by the state where you lived for the 180 day period that preceded that two years (called the 730-day rule).

Example. Suppose that you lived in Tennessee from February 1, 2013, to August 15, 2018, and, on August 16, 2018, you moved to Alabama. If you filed a bankruptcy case on April 23, 2019, you'd be limited to the Tennessee scheme because after going back 730 days before the move, you were living in Tennessee during the 180 days immediately before.

Did You Buy Your Home in the Last 40 Months?

Someone who owns a homestead for less than 40 months before filing for bankruptcy will be subject to a $189,050 exemption cap (this amount is current for cases filed between April 1, 2022, and March 31, 2025) regardless of the exemption scheme. This limitation was designed to discourage people from moving to take advantage of generous homestead exemptions offered by a handful of states.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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 April 7, 2022