If you don't have a mortgage, whether you can keep your home in Chapter 7 bankruptcy depends on the value of your house as well as your state’s exemption laws. Read on to learn more about how you may be able to keep your house in Chapter 7 bankruptcy even if you own it free and clear.
If you don’t have mortgages or other liens encumbering your house, you have to exempt its entire value in order to keep it. Otherwise, the Chapter 7 trustee can sell it and distribute the nonexempt portion of the proceeds among your unsecured creditors. (To learn more, see Your Home in Chapter 7 Bankruptcy).
Most states, as well as the federal exemption system, have a homestead exemption you can use to protect a certain amount of equity in your principal residence. However, homestead exemption amounts vary significantly from state to state. Certain states offer an unlimited homestead exemption while others don’t have one at all. (Find the amount of your state's homestead exemption.)
Even if your homestead exemption is not enough to cover the entire value of your house, you may be able to combine it with a wildcard exemption (which can be used for any type of property) to protect your house. As a result, if you own your home free and clear, check to see if you can fully exempt it by using all applicable exemptions.
Example. Matt’s house is worth $100,000. He doesn’t have a mortgage and owns the house free and clear. Matt’s state has a $125,000 homestead exemption. If Matt files for Chapter 7 bankruptcy, he can keep his house because he can fully exempt its entire $100,000 value with his homestead exemption.
If your exemptions are not enough to cover the entire value of your house, you may still have a chance to keep it. There are costs associated with selling a house in Chapter 7 bankruptcy. The trustee usually pays a third party to conduct the sale and gets a commission from the proceeds.
If you are able to exempt most of your home’s value, the nonexempt portion may be so small that it is only enough to cover sale costs and trustee commissions. In that case, the trustee may choose to abandon (not sell) your house because there will be nothing left over from the sale proceeds to distribute to creditors. If the trustee does not abandon the house, you may be able to pay an amount equal to the nonexempt portion of its value or exchange another asset for it if you want to keep your house.
Learn more about bankruptcy trustee abandonment of your home.