Should I File for Chapter 7 or Chapter 13 If I Want to Keep My Home?

It's possible to keep a house when you file for bankruptcy, but you must meet the requirements of the chapter you file. For instance, Chapter 7 filers must be current on payments and protect all home equity with a bankruptcy exemption. A filer who is unable to meet a requirement will likely lose the home.

Chapter 13 filers have more options. A Chapter 13 debtor behind on mortgage payments can use the three- to five-year Chapter 13 plan to catch up on missed payments and keep the house. The filer can also use the plan to pay for home equity they can't protect with a bankruptcy exemption. Read on to learn more about how to keep a house in bankruptcy Chapters 7 and 13.

Can I File for Bankruptcy and Keep My House?

Yes, in many instances, if you file for bankruptcy, you can keep your house. To ensure you won't lose your home in bankruptcy, you'll want to start by determining whether you can protect all of your home equity. Whether you're current on your payments will also play into the bankruptcy chapter you choose. We explain the steps of the analysis below.

You Must "Exempt" Your Home Equity to Keep a House in Chapter 7 or Chapter 13 Bankruptcy

Start by determining whether you can protect your home equity in bankruptcy.

You must complete this critical step in Chapter 7 and Chapter 13 because, in both bankruptcy chapters, you can protect or keep assets when a bankruptcy exemption covers the equity amount. Each state has a list of exemptions, so the property type and amount of equity you can protect using state exemptions will vary widely. Sometimes you can use the federal bankruptcy exemptions instead.

The Homestead Exemption

Only a few states let you keep all home equity when you file for bankruptcy. For instance, Texas and Florida allow residents to keep their homes regardless of worth. (But this is the first hurdle. You must meet the payment requirements discussed below.)

Most states have a much lower "homestead exemption" amount, and they vary widely between states. For instance, your state might have a $50,000 homestead exemption, and the neighboring state's exemption is $500,000.

The Wildcard Exemption

Other states allow filers to stack a "wildcard" exemption onto a homestead exemption when the homestead doesn't fully cover your equity. A wildcard exemption applies to a more extensive variety of property, although in most cases, limitations exist, so read the statute carefully.

Here's how these exemptions work in Chapters 7 and 13.

Protecting a House With an Exemption in Chapter 7 Bankruptcy

If the exemption isn't enough to cover your home equity, the Chapter 7 court-appointed trustee will sell your house. With the proceeds, the trustee will pay off the mortgage, give you the homestead exemption amount, and deduct sales costs and the trustee's fee. The trustee will use the remaining amount to pay other debts.

Protecting a House With an Exemption in Chapter 13 Bankruptcy

Chapter 13 bankruptcy works differently. Instead of giving up property you can't protect with an exemption, you'll pay for the nonexempt portion in your plan.

Of course, this could get expensive if you have significant nonexempt equity. If you can't prove you have enough income to pay the house's nonexempt equity and other required amounts, the bankruptcy court won't approve or "confirm" your plan.

But being able to protect or pay for your home equity isn't enough to keep your house in bankruptcy. Keep reading to learn about the other requirements you must meet.

Payment Requirements for Homes in Bankruptcy

Determining whether you can protect all home equity is one piece of the puzzle. Your payment status is another important consideration.

Chapter 7 Bankruptcy and Mortgage Currentness

Chapter 7 bankruptcy is often more attractive than Chapter 13 because it's simpler and gets you on the road to financial stability sooner. Most Chapter 7 cases are over in about four months because, unlike Chapter 13, filers don't pay into a three- to five-year Chapter 13 plan.

However, because Chapter 7 doesn't have a lengthy plan to help you manage mortgage debt, keeping a house in Chapter 7 bankruptcy can be more challenging. To keep your house in Chapter 7, you'll need to meet the following criteria:

• You're current on your house payments.
• You can protect your home equity with a bankruptcy exemption (we discussed this requirement above).
• You'll be able to continue making your payments in the future.

If you're behind on payments or fall behind after bankruptcy, the lender will use its lien rights to foreclose on the home. In many cases, if you're behind when you file, the lender will ask the court to lift the automatic stay to allow the lender to move forward with foreclosure. However, some lenders wait to foreclose until the bankruptcy case ends.

If you can't meet the requirements, Chapter 13 bankruptcy will be worth looking into. The Chapter 13 repayment plan gives you a better chance of keeping the home because you can address past-due payments and nonexempt equity. Chapter 13 might also allow you to eliminate a junior mortgage or home equity line of credit (HELOC) using a lien stripping procedure (more below).

Chapter 13 Bankruptcy and Past-Due Mortgage Payments

If you're behind on your mortgage payments, the Chapter 13 payment plan can help you get caught up and keep the house. However, it can be expensive depending on how far you've fallen behind and, as discussed above, if you must pay for nonexempt equity.

Propose a Repayment Plan

In Chapter 13 bankruptcy, you propose a repayment plan allowing you to pay your creditors over three to five years. You can treat your mortgage arrearage as a separate debt and add it to your payment plan. The benefit is you can catch up on arrearages over three to five years.

Show You Have Sufficient Income

Using the Chapter 13 plan to catch up on your arrearages will work if you have enough income to make your regular monthly mortgage payment and plan payment while in bankruptcy. The mortgage holder can't foreclose as long as you're paying your house and plan payments and keeping to your mortgage terms, like ensuring you have homeowners insurance.

Using Chapter 13 Bankruptcy to Remove Junior Liens From Your House

If you have a junior lien or HELOC on your home, you might be able to get rid of it through a process called "lien stripping." Lien stripping is available in a Chapter 13 case when your property is worth less than the primary loan balance.

To strip the lien, you must alert the court either in your Chapter 13 plan or by motion (the procedure will depend on your particular court). You'll present evidence of the property's value and mortgage loan balances. If the court finds one of the loans "wholly unsecured," meaning if the house were sold and the loans paid in order, not even a dollar would be available to pay the loan, the court will remove the lien from the loan.

You'll pay the lien-stripped loan with other unsecured debts, which must share your disposable income. In most instances, the remaining balances get wiped out at the end of the case (student loans are a common exception).

Learn about lien stripping and getting rid of second mortgages in Chapter 13 bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure 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.