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. Whether you can keep your home after filing for Chapter 7 bankruptcy will depend on the following factors:
If you’re behind on your payment, in foreclosure, or have more equity than you can protect, you’ll have a better chance of keeping your home in Chapter 13 bankruptcy. Filers faced with those circumstances should learn more about choosing between Chapter 7 or Chapter 13 when keeping a home.
Chapters 7 and 13 work very differently, so it’s important to understand what to expect—especially if you want to keep valuable property in Chapter 7. Here’s how it works.
After filing for Chapter 7, your property will go into a bankruptcy estate held by the Chapter 7 bankruptcy trustee appointed to your case. However, you don’t lose everything because you can remove (exempt) property reasonably necessary to maintain a home and employment. The trustee will sell any remaining assets and distribute the sales proceeds to your creditors.
Here’s the tricky part—if you make a mistake, it’s unlikely that the bankruptcy judge will allow you to dismiss the case, and you could lose the house. So you must follow the rules carefully.
You’ll likely lose your home if you’re behind on the mortgage payment when you file for Chapter 7. Although the automatic stay will temporarily stop a foreclosure, the best thing you can hope for is delaying 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. Why? If the lender couldn’t sell the home for the amount you owe, you'd be stuck with a deficiency balance depending on the laws of the state you live in.
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.
If your mortgage payment is up-to-date, your next step will be determining 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.
Learn more about filing for bankruptcy if you have equity in your 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. Either way, almost all states allow 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 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 deducting 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 about your home in Chapter 7 bankruptcy.