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:
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.
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.
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.
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.
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 the 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 protects more property overall (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.
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.
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:
Learn more about foreclosure in bankruptcy.
If your mortgage isn't current or your home's equity is partially nonexempt, you'll have a better chance of retaining your property in Chapter 13 than in Chapter 7 bankruptcy.
Chapter 13 bankruptcy lets you make monthly payments for three to five years to a bankruptcy trustee who distributes 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:
If you have enough income to do these two things while paying your monthly payment and meeting your other Chapter 13 payment obligations, you'll be able to keep your home. Also, if your home 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.
Sometimes a Chapter 7 trustee won't find your home is worth pursuing and will abandon it. When the trustee does, it reverts to you without restrictions.
Abandonment happens when the money available to pay creditors doesn't justify the time and money involved in selling the home. The trustee will determine whether a sale will generate enough cash to make a meaningful payment on your unsecured debt, such as credit card balances, personal loans, and medical and utility bills.
Here are things the trustee will consider:
Example. Suppose your home appraises at $200,000, the mortgage payoff is $140,000, and your exemption is $20,000, leaving $40,000 in nonexempt equity. The trustee estimates that the costs of sale and commission will total $22,000, leaving $18,000 to pay creditor claims. The trustee will likely sell the house.
If the trustee is interested in the equity in your house, you might be able to protect your property from sale by striking a deal with the trustee to substitute exempt assets or cash to "buy" back the property from the trustee.
For instance, in the example above, you could agree to pay the trustee $18,000 from exempt retirement funds, a home equity loan, borrowing from a sympathetic friend or relative, or selling other exempt property like jewelry or artwork.
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!
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