Can I File for Bankruptcy If I Own a Home?

It's a common myth that you can't file for bankruptcy if you have valuable assets or that you'll lose all of your property in bankruptcy. Although it's possible to lose your house if you own it and file for bankruptcy, that doesn't have to be the case. Whether you can protect your house will depend on the amount of your home equity, if you're behind on your payments, and your ability to continue making monthly payments during and after bankruptcy.

Prepare yourself before filing for bankruptcy by finding out when you might lose a home, how bankruptcy exemption laws protect a filer's home equity, and why it's easier to protect a home in Chapter 13 than Chapter 7.

Can You Lose Your House If You Own It When Filing for Bankruptcy?

Yes. Filing for bankruptcy won't help you keep your home if you can't afford the monthly mortgage payment, or catching up on past-due mortgage payments will spread you too thin. You'll also lose your home in Chapter 7 bankruptcy if you have more home equity than you're allowed to keep or can't afford to pay Chapter 13 creditors an amount equal to the unprotected equity.

If you don't quite understand this yet, don't worry. We explain each part in detail so it will make sense by the end of the article.

Bankruptcy Exemptions Protect Home Equity and Preserve Ownership

But that's not all. Bankruptcy exemptions protect other property, too.

You likely already know that bankruptcy doesn't strip you of all your assets, leaving you destitute, but you might not know why. You won't lose everything because exemption laws protect your property from creditors. The exemption laws let you keep or "exempt" the things you and your family need to maintain a home and job.

Understanding exemptions is powerful because most state exemption laws apply to other creditor actions. Once you familiarize yourself with your state's exemption laws, you'll know what you can protect from creditors before, during, and after filing for bankruptcy.

To find out whether exemption laws protect your home equity and other property, you'll review the exemptions that apply in your case. We cover that in the "How Do You Find Bankruptcy Exemptions for a Home and Other Property?" section below.

How Can a Homestead Exemption Protect a Home?

You can use a homestead exemption to protect at least some of the home's equity from creditors if the house is your primary residence. However, you can't use it to help you keep other real property, like a commercial building, rental unit, or vacation property you stay at occasionally.

This rule is universal across almost all states. You'll also need to be a resident for a particular time before using the state's exemptions. However, other aspects of the homestead exemption will vary by state, and the differences can be striking. Watch for these things.

Amount. Some states' homestead exemptions are meager, while others let you protect equity up to $500,000 or more. Most fall somewhere between the two extremes.

Property size. Some states include size and acreage limitations in the homestead exemption law. For instance, farming states often limit the number of acres of farmland you can protect. Or you might live in a state that allows large landholdings in rural communities but much smaller city parcels.

Spousal doubling. If you and your spouse own your home together and file a joint bankruptcy, you might be able to double the homestead amount and protect twice as much equity.

How Do You Find Property Exemptions?

Start by reviewing your state's property exemptions. Each state has exemption laws that tell residents and creditors the type of property residents can keep out of collection actions, including bankruptcy. You'll find your state's bankruptcy exemptions here.

Also, you'll want to know whether you must use your state's bankruptcy exemptions or if federal bankruptcy exemptions are available. Most people who can choose between the two exemption lists will use the set that best protects their home or more property (you can't mix and match between groups).

If the homestead exemption doesn't fully cover your home equity, check for a "wildcard" exemption that you can use on any property of your choice. But verify that you can use it on real estate. Not all states have a wildcard exemption, and some don't let filers use the wildcard on homes and other real property.

Can You Lose a Nonexempt House You Own?

Yes, you'll lose your home in Chapter 7 bankruptcy if you can't exempt your home's equity. The trustee will sell it, give you the exemption amount, and distribute the remaining proceeds to creditors.

You can lose a nonexempt house in Chapter 13 bankruptcy if you can't afford to pay your creditors an amount equal to the nonexempt equity. But you can keep it if you can pay for the home's nonexempt equity and all other amounts due through the Chapter 13 repayment plan.

Learn about nonexempt property and the best efforts rule in Chapter 13.

Filing for Chapter 7 With a Home

You'll need to do more than exempt your equity to keep your home in Chapter 7 bankruptcy. You must also be current on the mortgage when filing and remain current after bankruptcy. Otherwise, the lender can use one of two options to take the home back:

• ask the bankruptcy court to lift the automatic stay so the lender can foreclose during the case, or
• wait until the Chapter 7 case ends to foreclose on the home.

Learn more about foreclosure in bankruptcy.

Protecting Your House in Chapter 13 Bankruptcy

If your mortgage isn't current or your equity is partially nonexempt, you'll have a better chance of retaining your property in Chapter 13 than in Chapter 7.

Chapter 13 lets you make monthly payments for three to five years to a trustee who pays your debt by distributing those payments to creditors who've filed proper proof of claim forms. The benefit of the repayment plan is that you can use the Chapter 13 repayment plan to do the following:

• catch up on back payments, and
• pay for any nonexempt equity.

If you have enough income to do these two things while paying your monthly payment and meeting your other Chapter 13 payment obligations, you can keep your residence.

Reducing Mortgage Balances in Chapter 13

If the value is worth less than what you owe, you might be able to remove a wholly unsecured junior loan. Most people can't do this, but lien stripping is a powerful tool when available, so check it out, just in case.

Letting Go of a Home in Chapter 13

Sometimes, you might not be able to afford your house payment but still want to file for Chapter 13. In that case, you can let it return to the bank and stop making mortgage payments. The lender will receive a percentage of the money paid to your unsecured debts, and the remaining mortgage balance, including any late fees, will be eliminated or "discharged" when you complete the repayment plan.

Loan Modification Programs

If a loan modification might provide financial relief, try to complete your lender's workout process before filing for bankruptcy. Although some bankruptcy courts offer loan modification help, success isn't guaranteed because you'll need to meet financial guidelines to keep the home. It's best to determine whether you can keep the house before filing for bankruptcy, and pursue such programs during bankruptcy only after exhausting all other avenues.

Mortgage Loans After Bankruptcy

Once your bankruptcy is complete, you'll be responsible for paying the mortgage as usual. If you're behind on loan payments when you file Chapter 7, and the lender doesn't ask the court to lift the automatic stay to allow foreclosure (which the lender usually does), you can expect the lender to initiate or resume foreclosure proceedings when the case ends.

If you filed for Chapter 13, you'll continue making the monthly payment after completing the repayment plan. You'll be current because you will have paid any arrearages and late fees through the plan.

Downsides to Keeping a Home

The problem with keeping a home that you can't afford is that there's a high likelihood you'll lose it in the future. But that's not all. You might incur significant debt during the process.

You're likely well aware that when your monthly paycheck is spent before it's received, it's common to rely on credit cards, payday loans, and other means to cover unexpected expenses, as well as monthly household costs. Unless you can earn extra income, you could find yourself bankrupt again and lose your home.

The wrinkle is that you'd need to wait years before discharging the debt because filers must wait a significant period before erasing debt in a second bankruptcy. Your creditors will have years to collect from you through wage garnishments, bank levies, and property seizures.

So, after completing the calculations above, if paying the mortgage proves challenging, consider whether keeping the home serves your best interests. A truly clean financial slate alleviates significant stress, enabling many to rebuild their lives in unexpected and rewarding ways.

Learn about deficiency judgments after foreclosure and when debtors qualify for a home purchase after bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. Information needed to complete the official downloadable bankruptcy forms can be found on the Department of Justice's U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.