Can You Claim Bankruptcy and Still Keep Your House?

For many homeowners, the prospect of bankruptcy raises immediate concerns about their most significant asset: their home. It is a common worry whether filing for bankruptcy means an automatic loss of one’s residence. While the process of bankruptcy is complex and depends on individual circumstances, it is often possible to protect a home. Understanding the specific rules and options available within bankruptcy law can provide clarity. This article explores the pathways to potentially keeping your home while undergoing bankruptcy proceedings.

Understanding Home Equity and Exemptions

A fundamental concept in determining whether a home can be protected during bankruptcy involves understanding home equity. Home equity represents the current market value of your property minus the total amount of secured debt owed against it, such as your mortgage balance. For instance, if a home is valued at $300,000 and the outstanding mortgage is $200,000, the homeowner possesses $100,000 in equity. This equity amount is a crucial factor in how a home is treated during bankruptcy.

Bankruptcy exemptions are legal provisions designed to protect a certain amount of a debtor’s property from being liquidated by a bankruptcy trustee to pay creditors. These exemptions exist at both the federal and state levels. Debtors must choose one system, often dictated by state law.

The homestead exemption is a specific type of exemption that applies to a debtor’s primary residence. Its purpose is to shield a portion or, in some cases, all of the equity in a home from creditors. The amount of equity protected by a homestead exemption varies significantly by state. For example, the federal homestead exemption protects $31,575 of equity in a principal residence, an amount that can be doubled for married couples filing jointly. If the home’s equity falls within the applicable homestead exemption limit, it is considered protected.

Keeping Your Home in Chapter 7

Keeping a home in Chapter 7, often called liquidation bankruptcy, depends on the homeowner’s equity. A court-appointed trustee reviews assets to identify non-exempt property that can be sold to repay unsecured creditors. If home equity exceeds the homestead exemption, the trustee may sell the property.

The trustee’s decision is not automatic; they consider if a sale would generate a meaningful distribution after accounting for sales costs, outstanding mortgages, and the debtor’s exemption amount. If non-exempt equity is substantial, the trustee can initiate a sale. In such cases, the debtor might pay the trustee the non-exempt equity to retain the home.

Homeowners who wish to keep their home in Chapter 7 must be current on mortgage payments and ensure their home equity is fully protected by applicable exemption laws. If a mortgage is current and there is no non-exempt equity, the home is not at risk of trustee sale. Even if personal liability for the mortgage debt is discharged, the mortgage lien remains on the property, meaning the homeowner must continue making payments to avoid foreclosure by the lender.

A reaffirmation agreement is a voluntary contract between a debtor and a mortgage lender to continue personal liability for a mortgage debt that would otherwise be discharged in Chapter 7. This agreement ensures the debtor remains legally obligated to pay the mortgage, allowing them to keep the home and continue building credit history. While not always necessary, it provides certainty and is reviewed by the court. If a debtor defaults on a reaffirmed mortgage, the lender can pursue collection actions, including foreclosure.

Keeping Your Home in Chapter 13

Chapter 13 bankruptcy offers a structured path for individuals with regular income to reorganize their debts and keep their property, including their home. This chapter benefits homeowners who have fallen behind on mortgage payments but wish to retain their residence. Instead of liquidating assets, Chapter 13 involves proposing a repayment plan to creditors, spanning three to five years.

A key feature of Chapter 13 is the ability to “cure” mortgage arrears, which are missed or overdue payments. The repayment plan allows debtors to catch up on these arrears over the plan’s duration while simultaneously making their regular, ongoing mortgage payments. This structured approach provides a homeowner with time to address their past-due amounts and reinstate their mortgage, preventing foreclosure.

Chapter 13 also offers “lien stripping” for homeowners with multiple mortgages. This process reclassifies certain junior liens, such as second mortgages or home equity lines of credit (HELOCs), as unsecured debt. Lien stripping is possible if the home’s value is less than the first mortgage balance. If approved by the court, the stripped junior lien is treated like other unsecured debts in the repayment plan, often resulting in a lower or zero payout. Upon successful completion of the Chapter 13 plan, the reclassified debt is discharged, effectively removing the junior lien from the property.

How Other Debts and Liens Affect Your Home

The ability to keep a home during bankruptcy can be influenced by various types of debts and the liens associated with them. Liens are legal claims against a property that secure a debt, giving the creditor the right to take the property if the debt is not paid. These can be broadly categorized as voluntary or involuntary. Voluntary liens include mortgages and home equity lines of credit (HELOCs), which homeowners willingly grant to lenders. Involuntary liens are placed on a property without the owner’s consent, often as a result of unpaid taxes or court judgments.

Judgment liens arise when a creditor obtains a court judgment for an unpaid debt and records it against the debtor’s property. While bankruptcy can discharge the personal liability for the debt, the lien itself may remain attached to the property. The impact of a judgment lien on a home in bankruptcy depends on factors like the home’s equity and the applicable homestead exemption. If there is sufficient non-exempt equity, the lienholder may still be able to enforce their claim against the property after the bankruptcy case concludes.

Tax liens, imposed by government entities for unpaid taxes, behave differently from other liens in bankruptcy. Most tax liens are not dischargeable and will survive the bankruptcy process, remaining attached to the property. Even if a debtor’s personal obligation to pay the tax is discharged, the government can still enforce the lien against the property. In a Chapter 13 bankruptcy, debtors can include tax debts in their repayment plan, providing a structured way to pay off the taxes over time and potentially remove the lien upon completion of the plan.

The automatic stay, which takes effect immediately upon filing bankruptcy, provides immediate, temporary protection against collection actions, including foreclosure proceedings. This stay can halt an impending foreclosure, offering a crucial window for the debtor to assess their options and formulate a plan. While the automatic stay provides significant relief, it is not always a permanent solution, especially in Chapter 7, and creditors can petition the court to lift the stay under certain circumstances.