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

Yes, you can file for bankruptcy if you have home equity and keep your home. If you're like many considering filing for bankruptcy, your biggest worry is likely wondering what will happen to your house. If so, you're not alone. According to the American Bankruptcy Institute, the fear of losing one's home is one of the most common fears that prevents people from filing for bankruptcy.

With careful planning, you can avoid a home loss in bankruptcy. This guide explains the specific requirements for keeping a house in Chapters 7 and 13, giving you the tools and strategies you'll need to eliminate debt and get your fresh start while staying in your home.

Can I Keep My Home If I File for Bankruptcy With Equity?

Yes, you can protect your home equity and keep your home if you meet all requirements. Whether Chapter 7 or Chapter 13 will protect your home depends on whether bankruptcy exemptions fully cover your home equity, and mortgage payments are up to date.

Steps for Protecting Home Equity When Filing for Bankruptcy

Follow these steps to determine whether you can protect your home equity in bankruptcy:

1. Calculate your home equity.
2. Find your state's bankruptcy exemptions.
3. Determine whether all home equity is exempt.
4. Assess whether your mortgage will be current when you file.

Your answers will help determine whether Chapter 7 or Chapter 13 will keep your house safe.

What Is Home Equity and How Is It Calculated for Bankruptcy?

Home equity is the difference between what similar homes are selling for (your home's "fair market value") and the total amount you owe. Here's how to calculate home equity: Subtract the amount owed to your first mortgage, junior mortgages, HELOCs, and other liens, such as utility, tax, or mechanics liens, from the home's fair market value.

Example. Suppose your home is worth $300,000 and you owe $200,000 to your mortgage lender. You would have $100,000 in equity. However, if your house were worth $300,000 and you owed $200,000 on a first mortgage, $25,000 on a second mortgage, $10,000 on a HELOC, and $10,000 on a tax lien, you would owe a total of $245,000 and have $55,000 in equity.

Bankruptcy Exemptions: Protecting Home Equity and Assets

Bankruptcy exemptions are the laws that protect property from creditors when you file for bankruptcy. They ensure that you have the property you need to maintain a home and employment, and are part of what gives you your fresh start.

The Homestead Exemption: How to Safeguard Your Home in Bankruptcy

Each state has its own bankruptcy exemption laws, and "homestead" exemptions—the type that protects home equity—vary widely. Most states only allow you to use the homestead exemption on your primary residence, not on investment or vacation properties, because it's intended to help prevent homelessness. The amount of home equity covered by the homestead exemption is "exempt." Any portion of home equity not covered by the homestead exemption is "nonexempt."

Tip. Some states will allow you to use a "wildcard" exemption in addition to the homestead exemption to increase the protection. Additionally, the federal homestead exemption is more generous than the state exemption, so check both amounts if given the choice.

Handling Nonexempt Equity in Chapter 7 and Chapter 13 Bankruptcy

Nonexempt equity is home equity that exceeds your exemption amount, and creditors are entitled to it. (11 U.S.C. § 541.) How creditors are paid nonexempt equity depends on the bankruptcy chapter you file.

• Chapter 7. In Chapter 7, trustees can sell homes with nonexempt equity.
• Chapter 13. In Chapter 13, you can keep your home by paying the nonexempt amount through your repayment plan.

Tip. The Chapter 13 strategy can be expensive if you have a significant amount of equity or other debts that must be paid under the Chapter 13 plan.

Homestead Exemption Rules: State Limits and Timelines

When determining which exemption system you can use and whether the amount of equity you can protect with a homestead exemption will be capped at a specific dollar amount, you must answer a few questions.

40-month homestead exemption cap in bankruptcy. If your state's homestead exemption doesn't fully cover your equity, there's another reason not to count on a strategy of selling your home and rebuying it in a more generous state. Unless you purchase it more than 40 months before filing, you could face a $214,000 exemption cap regardless of state exemptions. This rule protects against exemption shopping. (11 U.S.C. § 522(p); amount valid April 1, 2025, through March 31, 2028.)

Homestead exemption 730-Day rule for bankruptcy. If you moved states within two years before filing, you must use homestead exemptions from the state where you lived 180 days before the two-year period. This rule prevents exemption shopping between states. (11 U.S.C. § 522(b)(3)(A).)

Example. Suppose that you lived in Tennessee from February 1, 2019, to August 15, 2024, and, on August 16, 2024, you moved to Alabama. If you filed a bankruptcy case on April 23, 2025, 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 preceding it.

Is Your Mortgage Current Before Bankruptcy? Why It Matters

In Chapter 7, you can keep the house if your mortgage payments are current. Otherwise, you'll eventually lose it to the lender through foreclosure. However, you can keep a home in Chapter 13 even if the payments aren't current. But you must be able to afford to catch up on the payments through the Chapter 13 plan.

Choosing Chapter 7 vs. Chapter 13 Bankruptcy to Protect Home Equity

This summary reviews the key factors to consider when choosing between Chapter 7 and Chapter 13.

Here's how Chapter 7 bankruptcy impacts home equity:

• Your home is generally safe if all equity is protected by exemptions and your mortgage payments are current.
• Be aware that having nonexempt equity means the trustee can sell your home to pay creditors.
• Doesn't provide a mechanism to catch up on overdue mortgage payments, potentially leading to foreclosure after the case.

Here's how Chapter 13 bankruptcy impacts home equity:

• You can typically keep your home with nonexempt equity by paying creditors the nonexempt equity value in the Chapter 13 repayment plan.
• You can cure missed mortgage payments through your plan, helping to prevent foreclosure. (11 U.S.C. § 1325.)
• Offers greater flexibility, making it suitable for homeowners with significant equity or mortgage arrears.

Learn more about which bankruptcy to file to keep your house.

Step-by-Step: What to Expect From the Bankruptcy Process

Once you've determined which chapter best meets your goals, the next step is understanding how the bankruptcy trustee will assess your home in each chapter.

How Does a Chapter 7 Bankruptcy Trustee Evaluate Home Equity?

The Chapter 7 trustee will review your bankruptcy petition and forms to find nonexempt property. The trustee's primary responsibility is to sell nonexempt assets, including a home with nonexempt equity, to pay creditors. Here's how it works.

The trustee sells the home, pays all mortgages, liens, taxes, expenses, and your exemption amount. The trustee then takes a commission, and the remaining funds go to creditors. If the sale won't yield enough for a worthwhile distribution to creditors, the trustee might not sell it.

However, your mortgage payments must be up to date. If not, the lender will foreclose. This can happen during Chapter 7 if the lender gets court permission to lift the automatic stay. It can also happen after you receive your bankruptcy discharge erasing qualifying debts and the stay is removed. The automatic stay temporarily stops collection actions, but doesn't eliminate your mortgage payment obligation. Lenders can seek to lift the stay and proceed with foreclosure if you aren't current.

How Does a Chapter 13 Bankruptcy Trustee Assess Your Home and Equity?

In Chapter 13, you can keep your home and other nonexempt property. This chapter lets you propose a repayment plan, typically three to five years, to catch up on missed mortgage payments and pay other debts. Missed payments are included as part of the regular plan payments, providing a structured way to cure default and prevent foreclosure.

You'll pay creditors the nonexempt equity amount and any missed mortgage payments to the Chapter 13 trustee as part of your monthly plan.

Tip. Creditors receive only as much as in Chapter 7, so you can deduct sales costs and trustee's fees from the nonexempt equity paid through the plan. Also, be aware of other Chapter 13 payment requirements you must afford.

Frequently Asked Questions About Bankruptcy and Home Equity

Here you'll find answers to many of your bankruptcy questions. More specific scenarios are addressed toward the end.

Can I keep my home if I file for bankruptcy?

Yes, it's often possible to keep your home when filing for bankruptcy. Success depends on your equity amount, current mortgage payments, and whether you file Chapter 7 or Chapter 13 bankruptcy.

What is "home equity" in bankruptcy?

Home equity is the difference between your home's fair market value and the total amount owed on mortgages and liens. For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 in equity.

What are "exemptions" and how do they protect my home equity?

Exemptions are laws that allow you to protect a certain amount of property, including home equity, from being taken by creditors in bankruptcy. Each state has its own exemption laws, and some offer a "homestead exemption" specifically for your primary residence. If your equity is fully covered by an exemption, it's "exempt" property.

What happens if I have "nonexempt equity" in my home?

Nonexempt equity is the portion of your home equity that exceeds the amount you can protect with exemptions. In Chapter 7, a trustee might sell your home to access this nonexempt value for creditors. In Chapter 13, you can usually keep your home by paying the value of this nonexempt equity to creditors through your repayment plan.

If I have nonexempt equity, should I file Chapter 7 or Chapter 13?

Chapter 13 is generally better if you want to keep your home with nonexempt equity. It allows paying back the nonexempt amount through a repayment plan, while Chapter 7 trustees would likely sell the house.

Can I keep my home in Chapter 7 if my mortgage payments aren't current?

No. Chapter 7 temporarily stops foreclosure but doesn't provide mechanisms to catch up on missed payments. Lenders will likely continue foreclosure after bankruptcy discharge unless payments become current.

Can I keep my home in Chapter 13 if my mortgage payments aren't current?

Yes, Chapter 13 is designed to help catch up on missed mortgage payments. Past-due amounts are included in your repayment plan while you make regular monthly payments.

How does a bankruptcy trustee evaluate my home?

In Chapter 7, trustees review paperwork to identify nonexempt property. If nonexempt equity exists after paying liens, expenses, and exemptions, trustees may sell the home. In Chapter 13, trustees evaluate equity and missed payments to determine plan requirements.

Do I still have to make my regular mortgage payments during bankruptcy?

Yes. To keep your home, continue making regular mortgage payments regardless of the bankruptcy chapter. In Chapter 13, you'll also pay missed payments or nonexempt equity through your plan.

What if I own my home with someone who isn't filing bankruptcy?

Only the debtor's interest is affected, but practically, it can still complicate things. Although the nonfiling coowner's interest isn't directly affected, the trustee can sell the property and compensate the coowner for their share. (11 U.S.C. § 363(h).)

What if my home is underwater and I owe more than it's worth?

The Chapter 7 trustee won't sell it because of the lack of equity. This typically means you can keep an underwater home in bankruptcy if mortgage payments remain current. Additionally, you might be able to remove any wholly unsecured junior mortgages or HELOCs in Chapter 13.

What if I have multiple properties?

The homestead exemption usually applies only to primary residences, making other properties more vulnerable. Investment properties typically can't be protected with homestead exemptions, although a few states have exceptions. You also might be able to protect an investment property with a state or federal "wildcard" exemption.

What happens in bankruptcy if my primary residence has a home equity line of credit or a second mortgage?

HELOCs and second mortgages are liens. To keep your home, you must continue payments on all debts in which the creditor has a lien. If you're behind on payments, Chapter 13 allows including past-due amounts in a plan. Also, in some instances, you can eliminate a junior mortgage or HELOC in Chapter 13. (11 U.S.C. § 1322(b)(2).) However, in Chapter 7, failing to pay debts associated with a lien against your home can lead to foreclosure.

Can I protect an investment property or vacation home in Chapter 7 or Chapter 13 bankruptcy?

Protecting investment properties is difficult because homestead exemptions usually apply only to primary residences. Most people lose investment real estate in Chapter 7 due to nonexempt equity. In Chapter 13, you can pay nonexempt equity through your plan.

If I recently transferred my home to a relative before filing for bankruptcy, can the trustee reverse the transfer?

Yes, a trustee can reverse recent transfers under a preferential or fraudulent conveyance theory to recover assets for creditors, especially if the transfer was intended to conceal the asset or occurred within a look-back period, which is typically longer for relatives. (11 U.S.C. § 544.)

How do IRS tax liens or unpaid property taxes impact my ability to keep my house in bankruptcy?

Bankruptcy doesn't eliminate these secured debts. In Chapter 7, you must pay the lien amount after the case closes—it won't be included in the discharge. In Chapter 13, you'll pay it in full through your plan, which can prevent a tax sale.

What are the risks if my property has a mechanic's lien or judgment lien when I file for bankruptcy?

In Chapter 13, you might be able to "avoid" or remove a judgment lien if it impairs your ability to benefit from an exemption, like the homestead exemption. Mechanic's liens are generally harder to remove.

How does bankruptcy work if my home is held in a trust or LLC?

The treatment depends on the trust or LLC type and control. If you control a revocable trust or solely own the LLC, the home is likely part of your estate. You should seek legal advice due to the complexity of this issue.

Can foreclosure proceedings on a rental property be stopped or delayed by bankruptcy?

Bankruptcy's automatic stay temporarily halts foreclosure. However, homestead exemptions usually don't apply. The bankruptcy court is sensitive to bad faith attempts to use the automatic stay to thwart creditors, especially in foreclosure matters. In some instances, using bankruptcy in this way will prevent the automatic stay from attaching in the future.

What happens if I inherit a house and then file for bankruptcy?

A house that you inherit before filing for bankruptcy, or within 180 days of filing, will be included in the bankruptcy case. (11 U.S.C. § 541(a)(5).) You'll need to protect it in the normal course, which means the homestead exemption won't apply unless it's your residence.

Is it possible to keep my home if I am behind on both the first and second mortgages?

Often, yes, especially in Chapter 13. You can propose a plan to catch up on arrears for both mortgages. Also, in Chapter 13, a wholly unsecured second mortgage might be "stripped off." In Chapter 7, you must bring both mortgages current.

How does bankruptcy impact properties in states with community property laws?

Because these laws are complicated and differ from state to state, you should consult a local bankruptcy lawyer, especially if you aren't filing with a spouse.