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

You won't automatically lose your home in Chapter 7, but you must meet Chapter 7 requirements. Unlike Chapter 13 bankruptcy, Chapter 7 isn't designed to help filers keep homes, cars, and other property. 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're behind on your payments, in foreclosure, or can't exempt all your home equity, you'll have a better chance of keeping your house with Chapter 13 bankruptcy. Learn more about what you must do to keep a home in Chapter 7, and when filing for Chapter 13 would be the better option.

How to Keep Your 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.

Requirements to Keep Your House in Chapter 7

To keep your home in Chapter 7, you must satisfy both requirements:

• Requirement 1: Protected Home Equity. Your state's bankruptcy exemptions must fully protect any equity you have in your home. If exemptions don't cover all equity, the trustee can sell the property to pay creditors.
• Requirement 2: Current Mortgage Payments. You must be current on your mortgage and able to continue making payments throughout and after bankruptcy. Your lender is entitled to either the mortgage payments or the return of the home through foreclosure.

Meeting just one requirement isn't enough. You need both to keep your home in a Chapter 7 bankruptcy.

The Chapter 7 Trustee and Your Home

Because you don't want to lose your home, the first thing to evaluate is whether the trustee can sell your home if you file for Chapter 7.

When the Trustee Can Sell Your Home

The Chapter 7 trustee can sell your home if you have equity that exceeds your available exemptions. The trustee won't sell if you have no equity or if exemptions fully protect the equity you have. Even if you have excess equity, the trustee might abandon the property if the sale costs and trustee fees leave little for creditors.

How the Chapter 7 Bankruptcy Trustee Evaluates Your Home

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. (11 U.S.C. § 541.) You temporarily lose ownership, 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. (11 U.S.C. § 522(b).) The exemptions list the property bankruptcy filers can keep. If you can't exempt the property, the trustee will sell it to benefit creditors.

Your Home Equity in Chapter 7

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. (11 U.S.C. § 522(d)(1).)

How to Calculate Home Equity

You calculate 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.

Why Zero Equity Protects Your Home

If your home is worth less than what you owe, or if mortgages and liens equal the home's value, you have zero equity. The trustee can't sell a house with no equity because there would be no funds available for creditors after paying off the secured lenders. In this situation, no exemption is needed to protect the home.

Homestead Exemptions: Protecting Your Home Equity

State exemption statutes list the property that its residents can protect in bankruptcy. 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 a Chapter 7 case. (11 U.S.C. § 522(b).)

State Homestead Exemption Limits

Each state has its own homestead exemption amount, and they vary greatly. Some states offer unlimited protection, while others provide only modest protection.

States with unlimited or high exemptions:

• Florida and Texas. Unlimited homestead exemptions for qualifying properties. (Fla. Const. art. X, § 4; Tex. Prop. Code § 41.001.)
• Iowa, South Dakota, Oklahoma, and Kansas. Unlimited exemptions with acreage restrictions. (Iowa Code § 561.2; S.D. Codified Laws § 43-31-1; Okla. Stat. tit. 31, § 1; Kan. Stat. § 60-2301.)

States with lower exemptions:

• Pennsylvania. No state exemption, must use the federal homestead exemption.
• New Jersey. No state exemption, must use the federal homestead exemption. (11 U.S.C. § 522(d)(1).)

For your state's current exemption amount and eligibility requirements, consult with a local bankruptcy attorney. Exemption amounts change periodically, and specific requirements may apply.

Mortgage Payment Requirements in Chapter 7

You don't get to wipe out or "discharge" your mortgage and keep your home. Here's what you must do to satisfy your lender.

Must You Be Current on Mortgage Payments?

Yes, if you're behind on your payments, your lender can recover the home because it's entitled to either the mortgage payments or the return of the house. So, you'll meet this requirement if your mortgage is current and will remain current after bankruptcy. If not, you'll likely lose the house.

What Happens If 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.

Can Chapter 7 Stop Foreclosure?

Chapter 7 can temporarily stop foreclosure through the automatic stay, but it won't permanently prevent foreclosure if you're behind on payments. The automatic stay is a court order that immediately halts most collection activities, including foreclosure proceedings. (11 U.S.C. § 362(a).)

However, this protection is temporary in Chapter 7. If you're behind on mortgage payments, the lender can ask the court to lift the automatic stay to allow foreclosure proceedings to continue. (11 U.S.C. § 362(d).) 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 Doesn't Cure Mortgage Default

Chapter 7 bankruptcy doesn't offer a payment plan that allows you to catch up on overdue payments over time. Also, Chapter 7 doesn't erase the voluntary lien that permits the lender to obtain the home if you don't pay. (11 U.S.C. §§ 506(d), 522(c)(1).) The lender can foreclose after the automatic stay lifts, and you'll lose the house.

What to Consider If You're Behind and Want to Keep Your Home

Chapter 13's repayment plan helps you keep your home by allowing you to catch up on missed payments over time. In a Chapter 13 case, you can spread mortgage arrears over three to five years while making your regular monthly payment. This option is specifically designed for people who have fallen behind but have enough income to resume regular payments and gradually cure the default.

Foreclosure and Deficiency Balance Risks After Chapter 7

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.

Can't Afford Mortgage Payments After Chapter 7?

If you can't pay and the lender forecloses on the home, you could find yourself in a worse position. Depending on the laws of your state, you might be stuck paying a deficiency balance.

Deficiency Balances: When You Still Owe After Foreclosure Sale

A deficiency balance is the amount remaining after a home is sold at auction and the proceeds are applied to the loan balance. It's the amount you could be responsible for paying if the lender doesn't sell the home for the amount you owe.

In Chapter 7 bankruptcy, your personal liability for the mortgage debt is discharged. (11 U.S.C. § 727(b).) If you surrender the home in Chapter 7, you won't owe a deficiency balance.

The 8-Year Rule: Waiting Period Before Filing Chapter 7 Again

It's essential to plan and time a Chapter 7 filing so you don't find yourself in debt again shortly thereafter. For instance, you don't want to find yourself in a position in which you keep your home in Chapter 7, only to lose it to foreclosure afterward.

The problem? If you live in a state that allows deficiency balance collection, you'd have to wait eight years to file a second Chapter 7 bankruptcy, leaving the lender plenty of time to collect the deficiency through methods such as wage garnishment or bank account levies. (11 U.S.C. § 727(a)(8).)

Chapter 13 vs. Chapter 7: Which Bankruptcy Protects Your Home?

Chapter 7 won't be an option if you can't protect all equity using bankruptcy exemptions or if you're behind on your payments. In that case, Chapter 13 will be the better choice.

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. (11 U.S.C. § 1325(a)(4).)

When Chapter 7 Is Better for Your Home

Choose Chapter 7 if:

• Your mortgage payments are current and will remain current.
• Exemptions fully protect your home equity.
• You want a quick bankruptcy over three to four months rather than a three- to five-year commitment.
• You don't need time to catch up on arrears.

When Chapter 13 Is Better for Your Home

Choose Chapter 13 if:

• You're behind on mortgage payments but can afford to catch up over time.
• You have excess home equity that exemptions don't protect.
• You're facing foreclosure and need long-term protection.
• You want to keep other property you'd otherwise lose in Chapter 7.

Chapter 7 vs. Chapter 13 Comparison for Homeowners

Find out more about whether it's better to file for Chapter 7 or Chapter 13 to keep a home.

FAQs About Keeping Your Home in Chapter 7

• Can I File Chapter 7 If I Have Equity in My Home?
• How Much Equity Can I Have in My Home and Still File Chapter 7?
• Will Chapter 7 Stop Foreclosure on My Home?
• What Happens to My Mortgage Debt in Chapter 7?
• Do I Need a Reaffirmation Agreement to Keep My Home?
• Can I Buy a Home After Filing Chapter 7 Bankruptcy?

Can I File Chapter 7 If I Have Equity in My Home?

Yes, you can file Chapter 7 if you have equity in your home, as long as your state's homestead exemption and any available wildcard exemptions fully protect that equity. If you have more equity than your exemptions cover, the Chapter 7 trustee can sell your home to pay creditors.

How Much Equity Can I Have in My Home and Still File Chapter 7?

The amount of home equity you can protect differs between states and will depend on your state's homestead exemption laws. You can find out how much you can protect by reviewing your state's exemption laws.

Will Chapter 7 Stop Foreclosure on My Home?

Chapter 7 will temporarily stop foreclosure through the automatic stay, which takes effect immediately when you file. However, this is only a short-term solution. If you're behind on mortgage payments, the lender can ask the court to lift the stay and proceed with foreclosure. Chapter 7 doesn't provide a mechanism to catch up on missed payments, so it's not an effective long-term foreclosure solution if you're in default.

What Happens to My Mortgage Debt in Chapter 7?

Your personal liability for the mortgage debt (the obligation to repay) is typically discharged in Chapter 7. (11 U.S.C. § 727(b).) However, the lien on your property survives bankruptcy. (11 U.S.C. § 522(c)(1).) Although you're no longer personally obligated to pay the debt, the lender can still foreclose on the home if you don't make payments. To keep your home, you must continue making mortgage payments even though the personal obligation is discharged.

Do I Need a Reaffirmation Agreement to Keep My Home?

A reaffirmation agreement is a new contract with your mortgage lender that makes you personally liable for the mortgage debt again, even after bankruptcy. While some lenders request reaffirmation agreements, they're not required in most cases. (11 U.S.C. § 524(c).) You can typically keep your home by simply continuing to make payments, a practice called "ride-through" or "retain and pay."

Can I Buy a Home After Filing Chapter 7 Bankruptcy?

Yes, you can buy a home after Chapter 7 bankruptcy, but you'll need to wait for your credit to recover and meet lender requirements. You must wait two to four years for conventional financing, but FHA loans might be available sooner. Qualification depends on reestablishing credit, maintaining a stable income, and saving for a down payment.

Need More Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.