Can You File Bankruptcy If You Have Equity in Your Home?

Filing for bankruptcy offers a path to financial relief. For homeowners, a common concern is how their home equity might be affected. Having equity in a home does not automatically prevent a bankruptcy filing, but it introduces specific considerations that influence the outcome. This overview clarifies how home equity is treated within different bankruptcy chapters.

Understanding Home Equity and Bankruptcy Chapters

Home equity represents the portion of a property’s value a homeowner truly owns. It is calculated by subtracting the total amount owed on all mortgages and other liens from the home’s current market value. For instance, if a home is valued at $400,000 with an outstanding mortgage of $300,000, the homeowner possesses $100,000 in equity.

Personal bankruptcy typically involves two main types: Chapter 7 and Chapter 13. Chapter 7, often called liquidation bankruptcy, aims to provide a fresh financial start by discharging many unsecured debts. A court-appointed trustee may liquidate certain non-exempt assets to repay creditors.

Chapter 13 is a reorganization plan for individuals with regular income. It allows debtors to develop a repayment plan, usually three to five years, to pay back all or part of their debts. Chapter 13 generally allows debtors to keep their property, including their home, throughout the repayment period.

Homestead Exemptions and Home Equity in Bankruptcy

Bankruptcy exemptions determine what property a debtor can retain during proceedings. These legal provisions protect certain assets from being sold by the bankruptcy trustee to satisfy creditor claims. For homeowners, the “homestead exemption” is relevant, as it applies to equity in a primary residence.

The United States Bankruptcy Code establishes federal exemptions. As of April 1, 2025, the federal homestead exemption allows an individual to protect up to $31,575 of equity in their home. For married couples filing jointly, this amount effectively doubles.

While federal law governs bankruptcy, states establish their own exemption laws. Many states require debtors to use state-specific exemptions, while others allow debtors to choose between federal and state systems. State homestead exemption amounts vary widely, with some states offering higher protections than the federal amount. Debtors must select one set of exemptions and cannot combine provisions from both federal and state lists.

A homestead exemption directly reduces the amount of a home’s equity considered non-exempt. For example, if a home has $50,000 in equity and the applicable homestead exemption is $31,575, then $18,425 of that equity would be non-exempt. A federal rule may cap the homestead exemption at $189,050 if the debtor has not owned the home for at least 40 months before filing.

Treatment of Home Equity in Chapter 7 and Chapter 13

The bankruptcy chapter chosen dictates how home equity is managed and whether a homeowner can retain their property. The impact of home equity differs between Chapter 7 and Chapter 13 filings.

In Chapter 7, a court-appointed trustee reviews the debtor’s assets, including home equity, to identify any non-exempt value. If the home’s equity is fully covered by the applicable homestead exemption, the home is generally safe from liquidation. The trustee cannot force a sale to pay unsecured creditors.

If the home contains non-exempt equity, the Chapter 7 trustee may elect to sell the property. The trustee’s decision depends on whether a sale would generate a meaningful return for creditors after accounting for the mortgage, selling costs, and the debtor’s homestead exemption. If selling costs, secured debts, and the exemption leave little or no funds for unsecured creditors, the trustee is unlikely to pursue a sale.

For debtors in Chapter 7 who wish to keep a home with non-exempt equity, options exist. One option is a reaffirmation agreement, where the debtor agrees to continue mortgage payments and remains personally liable for the debt. While reaffirmation allows the debtor to keep the home, it re-establishes personal liability. Another approach, sometimes called “ride-through” or “retain and pay,” involves continuing regular mortgage payments without formally reaffirming the debt. Some lenders may permit this, allowing the debtor to keep the home without personal liability.

In contrast, Chapter 13 offers a more direct path for homeowners to retain their property, even with significant equity. This chapter allows debtors to keep their assets while repaying debts through a court-approved plan. Non-exempt home equity in Chapter 13 influences the amount paid to unsecured creditors through the repayment plan.

The repayment plan must ensure unsecured creditors receive at least as much as they would in Chapter 7 liquidation. Any non-exempt equity must be accounted for in the plan payments. This amount is typically spread out and paid over the three-to-five-year duration of the Chapter 13 plan. Chapter 13 also provides a mechanism for debtors to catch up on past-due mortgage payments, preventing foreclosure while the plan is in effect. Plan feasibility is tied to the debtor’s income and the value of their non-exempt assets, including home equity.