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 assets with value or that you must lose those assets if you file bankruptcy—but that's not the case. Often you can protect things like a home, but it depends on how much equity you have in the property and where you live.

What Are Bankruptcy Exemptions?

Bankruptcy won't leave you destitute by stripping you of all your assets. You're allowed to keep the basics that you and your family will need while you're in bankruptcy, as well as after you finish your case. The items you keep are called exempt property because they're protected from the reach of the bankruptcy court and your creditors.

Exemption Limitations

Not only is there a list of federal exemptions in the bankruptcy code, but each state also defines the exemptions available to its residents. Exemptions are limited in two ways:

• You can exempt only particular types of property.
• You can protect property up to a designated value.

Some states allow you to pick between federal and state exemptions, depending on which list best protects your property. To find out the assets that you'll be able to protect in your state, see Bankruptcy Exemptions by State.

Home Exemptions

Most states allow you to protect some amount of value in your homestead—which is usually your primary residence. Depending on the state, this amount can be as little as $5,000 or none; extend to cover all your equity (subject to a cap if you've recently moved to a new state); or something in between. (Learn more in What Is a Bankruptcy Homestead Exemption?)

If you can choose the federal exemptions, you might be better off choosing them. The amounts change from time to time. You'll find the most current figures in The Federal Bankruptcy Exemptions.

When Your House Isn't Exempt

Ordinarily, in a Chapter 7 bankruptcy, you must relinquish any nonexempt property to the bankruptcy trustee responsible for administering your matter. However, just because you can't protect all of your equity doesn't necessarily mean that you'll lose your property.

Most Chapter 7 trustees won't attempt to liquidate nonexempt property unless the effort nets a meaningful payment on your unsecured debt, such as credit card balances, personal loans, and medical and utility bills. In other words, after the trustee pays out the required amounts, there must be money left over. So, although there are no hard and fast rules when deciding whether to liquidate your home for the bankruptcy estate, the trustee will consider the following:

• the appraised value of the property
• costs of sale, including sales commissions, necessary repairs, inspections, etc.
• balances on any mortgages (the trustee must pay off mortgages first)
• the existence of other liens, like tax liens, outstanding property taxes, mechanic's liens, etc. (the trustee must pay liens in full out of the proceeds)
• whether the proceeds will be split with a co-owner
• how long the property will be on the market
• amount of the trustee's commission, and
• amount of unsecured debt you owe.

Example. Suppose the following facts are true: your home appraises at $200,000, the payoff on your mortgage is $140,000, and your exemption is $20,000. That leaves $40,000 in nonexempt equity. The trustee estimates that the costs of sale and her commission will total $22,000. She estimates that after the sale, she'll have $18,000 to pay creditor claims that total $30,000. Because the trustee would pay creditors more than half their claims, the trustee will probably sell the house.

Trustee Abandonment

If the trustee looks at all the facts and decides not to seize and sell your house, she will abandon it—formally notify the court of her decision not to pursue that property. When the trustee abandons the property, it reverts to you without restrictions.

Substituting Exempt Property

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.

Protecting Your House with Chapter 13 Bankruptcy

You can also retain your property if you file a Chapter 13 case rather than a Chapter 7 bankruptcy. Under Chapter 13 bankruptcy, you submit a proposed plan to make monthly payments for three to five years to a bankruptcy trustee who distributes those payments to creditors who've filed proper claims. In a Chapter 13 case, you won't be required to turn over any property (other than cash).

Before the bankruptcy court approves your payment plan, you have to meet two threshold requirements. The plan has to be a good deal for the unsecured creditors, and it has to be financially feasible for you.

• Best interests of creditors test. The bankruptcy court cannot approve a Chapter 13 plan unless the unsecured creditor debt, like credit cards and medical bills, will receive at least as much as they would have received if you had filed a Chapter 7 matter. In the example above, under Chapter 7, the trustee would have $18,000 to pay unsecured creditors' claims. Therefore, under your Chapter 13 plan, you will have to make payments that will net at least $18,000.

• Feasibility of the Chapter 13 plan. Because you typically make your Chapter 13 payments with future income, the Chapter 13 trustee has to ensure that you can afford to make the payment each month. She will scrutinize your household and personal expenses and your income (including any pension payments, Social Security benefits, part-time jobs, roommate contributions, etc.) to ensure that you can afford the payments you propose in your Chapter 13 plan.

Consulting With an Attorney

In most cases, your home equity is your most valuable asset. To properly protect it, consider speaking with a knowledgeable bankruptcy lawyer about your options.