You won’t necessarily lose your home in Chapter 7 bankruptcy—especially if you don’t have much home equity and the mortgage is current. But if you’re facing foreclosure or you have significant equity, filing for Chapter 13 bankruptcy might be the better option.
Being able to exempt all of your home equity is a crucial part of protecting your home. However, it isn’t enough. Whether you’ll lose your home in Chapter 7 bankruptcy will depend on all of the following factors:
After filing for Chapter 7 bankruptcy, all of your property will go into what is known as a bankruptcy estate. You don’t lose everything, however. You’re allowed to remove (exempt) property reasonably necessary to maintain a home and employment from the estate. The Chapter 7 bankruptcy trustee will sell the remaining assets and distribute the sales proceeds to your creditors.
If you make a mistake, it’s unlikely that the bankruptcy judge will allow you to dismiss the case, and you could lose valuable property. Therefore, to avoid losing your home, you’ll want to be sure you understand what will happen to it before you file for Chapter 7 bankruptcy.
You’ll likely lose your home if you’re behind on the mortgage payment when you file your Chapter 7 case. Although the automatic stay will stop a foreclosure temporarily, the best that you can hope for is to delay the process for a few months.
It’s also important to be sure you can afford to continue paying the mortgage payment after a Chapter 7 bankruptcy. Losing the house after your case might put you in a worse financial position.
A local bankruptcy attorney can help you assess the risks (state laws differ). Also, keep in mind that you’d have to wait eight years to file a second Chapter 7 bankruptcy, leaving the lender plenty of time to collect a deficiency balance using collection methods such as garnishing your wages or levying on a bank account.
If your mortgage payment is up-to-date, your next step will be to determine how much equity exists. You’ll start by valuing your home. Then you’ll subtract any outstanding mortgage balance from the home value. The equity would be the amount you’d have in your pocket if you were to sell the house.
If you don’t have any equity, you’re in good shape—trustees don’t sell houses without equity. Otherwise, you’ll need to be able to protect your equity with a bankruptcy exemption to avoid losing the home in Chapter 7 bankruptcy.
(For more details, see Can I File for Bankruptcy If I Have Equity in My Home?)
State exemption statutes list the property its residents can protect in bankruptcy. Some states allow residents to choose between either the state exemption list or the federal bankruptcy exemption scheme.
If your exemptions adequately cover your equity, the trustee won’t sell your home in a Chapter 7 bankruptcy. However, if your exemptions protect only a portion of it, the trustee will sell the house, pay off the mortgage, give you the amount you’re entitled to exempt, and use the remainder of the sales proceeds to pay creditors.
Keep in mind that the trustee will take into account the costs to sell the home. If, after sales costs, the amount remaining isn’t enough to make a meaningful payment to creditors, the trustee will abandon the property (and you’ll get to keep it).
(Learn more in Your Home in Chapter 7 Bankruptcy.)