Will I Lose My Home If I File for Chapter 7 Bankruptcy?

Find out if you can file for Chapter 7 bankruptcy and keep your house.

By , Attorney · University of the Pacific McGeorge School of Law

You won't necessarily lose your home in Chapter 7 bankruptcy, especially if you don't have much home equity and your mortgage is current. But, unlike Chapter 13 bankruptcy, Chapter 7 isn't designed to help filers keep homes, cars, and other property. You could lose your home if you don't meet Chapter 7 requirements.

For instance, if you can't protect all home equity with a bankruptcy exemption, the Chapter 7 bankruptcy trustee appointed to your case will sell it for the benefit of creditors. Also, your lender can recover your house if your mortgage isn't current during and after your Chapter 7 case. If you can't meet both requirements because you're behind on your payment or in foreclosure, or you can't exempt all home equity, you'll have a better chance of keeping your house using Chapter 13 bankruptcy.

Keeping a Home in Chapter 7 Bankruptcy

If you file for Chapter 7 bankruptcy, the trustee and your lender will each determine whether they can take your home. Below, we explain what to do to keep your house safe in Chapter 7.

Your Home and the Chapter 7 Bankruptcy Trustee

The trustee is responsible for selling assets for the benefit of creditors. To give the trustee time to evaluate your property, all of your assets become part of a bankruptcy estate when you file for bankruptcy. You lose ownership temporarily and the trustee manages your property in your place.

You can "exempt" or remove property from the estate if it's allowed by your state's bankruptcy exemptions. The exemptions list the property bankruptcy filers can keep. If you can't exempt the property, the trustee will sell it for the benefit of creditors.

How Much Equity Is in the Home?

You can determine whether you can keep your home safe from the trustee if you know how much home equity you have and your state's "homestead exemption" amount.

Start by valuing your home. Calculate the home equity by subtracting any outstanding mortgage balance and liens from the home value. The equity is the amount you'd have in your pocket after selling the house and paying all mortgages, home equity lines of credit (HELOCs), and liens.

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.

Learn more about filing for bankruptcy if you have equity in your home.

Can You Protect Home Equity With Bankruptcy Exemptions?

State exemption statutes list the property its residents can protect in bankruptcy. Some states allow residents to choose between the state exemption list or the federal bankruptcy exemption scheme.

Either way, almost all states permit residents to protect some home equity with a homestead exemption. You might be able to exempt even more with a wildcard exemption. If your exemptions adequately cover your equity, the trustee won't sell your home in Chapter 7.

However, the trustee will sell the house if your exemptions protect only a portion of your equity. The sales proceeds will be used to pay mortgages, HELOCs, and liens. You'll receive the exemption amount. Creditors will receive whatever remains after deducting sales costs.

Although you can't figure costs into your equity determination, the trustee will consider costs before selling the home. If there isn't enough to make a meaningful payment to creditors after paying mortgages and liens, returning the homestead exemption to you, and deducting sales costs and the trustee's fee, the trustee will abandon the property, and you'll get to keep it.

Your Home and the Lender in Chapter 7 Bankruptcy

You don't get to wipe out or "discharge" your mortgage and keep your home. Your lender is entitled to mortgage payments or the return of the home. Here's what you must do to satisfy your lender.

Are Your House Payments Current?

You'll meet this requirement if your mortgage is current and will remain current after bankruptcy. If not, you'll likely lose the house.

When You're Behind on Payments

When you file for Chapter 7, the automatic stay stops collection actions, including foreclosures. But if you're behind on the mortgage payment, the best you can hope for is to delay the process for a few months.

What will happen if you file? The lender can ask the court to lift the automatic stay to allow foreclosure proceedings to continue. The court will likely grant the request if the trustee doesn't plan to sell the home. Alternatively, the lender can wait until the bankruptcy ends, proceed with foreclosure, and sell the house at auction.

Why Chapter 7 won't cure a default. Chapter 7 bankruptcy doesn't allow you to catch up on the overdue payments over time. Also, Chapter 7 doesn't erase the lien that permits the lender to obtain the home if you don't pay. The lender can foreclose after the automatic stay lifts, and you'll lose the house.

Making House Payments After Chapter 7 Bankruptcy

Being able to pay the mortgage after Chapter 7 is critical because losing the house after your case might put you in a worse financial position. Why? Depending on the laws of your state, you might be stuck paying a deficiency balance if the lender couldn't sell the home for the amount you owe. (A deficiency balance is the amount remaining after a home is sold at auction, and the proceeds are applied to the loan balance.)

Worse yet? 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.

Too Much Equity? Need Time to Pay Arrearages? File for Chapter 13.

Chapter 13's repayment plan allows you to catch up on mortgage arrearages over time and prevent a home loss. You can also use the Chapter 13 plan to pay your creditors the value of the nonexempt equity you can't protect with a homestead exemption.

Find out more about keeping a home by filing for 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!

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Helpful Bankruptcy Sites

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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.

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