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 the circumstances must be right, and you'll need to be sure that you 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.
• Chapter 13 filers behind on a mortgage can catch up on missed payments and keep the house.

Read on to learn what you'll need to do to keep a house in bankruptcy Chapters 7 and 13.

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

Start by determining whether you can protect all of 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. Only a few states let you keep all of your home equity when you file for bankruptcy. Most states have a much lower "homestead exemption."

Here's how the homestead exemption works in Chapters 7 and 13.

Protecting a House With an Exemption in Chapter 7 Bankruptcy

Suppose the exemption isn't enough to cover all of your home equity. In that case, 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. You'll have other requirements you must meet, as well.

Keeping Your House in Chapter 7 Bankruptcy

A 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 repayment plan.

However, because Chapter 7 doesn't help you manage mortgage debt, keeping a house in Chapter 7 bankruptcy can be more challenging.

• If you're behind on payments, the lender will use its lien rights to foreclose on the home after asking the court to lift the automatic stay or wait until the bankruptcy case ends.
• If you have nonexempt equity, the bankruptcy trustee will sell the house and use the proceeds to pay other creditors.

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 all of your home equity with a bankruptcy exemption (see above).
• You'll be able to continue making your payments in the future.

If you can't meet the requirements, Chapter 13 bankruptcy will be a better choice. The Chapter 13 repayment plan lets you address past-due payments and nonexempt equity and keep the house. Chapter 13 might also allow you to get rid of a second or third mortgage using a lien stripping procedure (more below).

Chapter 13 Bankruptcy and Past-Due Mortgage Payments

If you're behind on your mortgage payments and want to keep the house, Chapter 13 bankruptcy provides a mechanism for helping you get caught up, something that Chapter 7 bankruptcy can't do.

Propose a Repayment Plan

In Chapter 13 bankruptcy, you propose a repayment plan that will allow 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.

Show You Have Sufficient Income

Using the Chapter 13 plan to catch up on your arrearages will only work if you have the income to make both your regular monthly mortgage payment and your plan payment while you're in bankruptcy.

Once you're in Chapter 13, the mortgage holder can't foreclose if you're paying your house and plan payments on time and keeping to your mortgage terms, like ensuring that you have homeowners insurance in place.

Using Chapter 13 Bankruptcy to Remove Junior Liens From Your House

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

To strip the lien, you'll have to file a motion in the bankruptcy court and present evidence on the property's value and the mortgage loan balances. If the court voids the junior lien, you'll pay it with other unsecured debts, and any remaining balance will get wiped out at the end of the case.

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

Need More Bankruptcy Help?

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!

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.