Can You Keep Your House in Chapter 7?

It is often possible to retain your home when filing for Chapter 7 bankruptcy, though it depends on several specific factors. This legal process, designed to provide a financial fresh start by discharging certain debts, involves careful consideration of your assets, particularly your primary residence. Understanding how bankruptcy laws interact with homeownership is important for anyone considering this path.

How Chapter 7 Affects Your Home

When a Chapter 7 bankruptcy petition is filed, a “bankruptcy estate” is immediately created. This estate becomes the legal owner of all the debtor’s property, including their home. The purpose of this estate is to gather the debtor’s assets, which a court-appointed bankruptcy trustee reviews. The trustee’s role is to liquidate any non-exempt assets to pay creditors.

A mortgage is considered a secured debt, meaning it is backed by specific collateral—the home itself. This differs from unsecured debts like credit card balances or medical bills, which are not tied to any physical asset. In bankruptcy, secured creditors, such as mortgage lenders, maintain their right to the collateral even if the personal obligation to pay the debt is discharged. If mortgage payments are not continued, the lender can still pursue foreclosure after the bankruptcy case concludes.

A factor the bankruptcy trustee considers regarding your home is the amount of equity you possess. Equity is the difference between your home’s current market value and the total amount of outstanding debt secured by the property. For example, if your home is valued at $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. The trustee evaluates this equity to determine if there is a non-exempt portion that could be sold to repay your unsecured creditors.

Protecting Home Equity with Exemptions

Bankruptcy exemptions are legal provisions that allow individuals to protect a certain amount of their property from being liquidated by the bankruptcy trustee. These exemptions are designed to ensure debtors can retain assets needed for a fresh start. Without exemptions, nearly all assets could be sold to satisfy debts.

Debtors have a choice between using federal bankruptcy exemptions or their state-specific exemptions, although some states mandate the use of their own exemption laws. This choice is important because exemption amounts can vary significantly between federal and state laws, and one set may offer more protection for specific assets than the other. Debtors select the system that provides the most favorable protection for their assets.

The “homestead exemption” is designed to protect a debtor’s primary residence. This exemption allows individuals to shield a certain amount of equity in their home from the bankruptcy estate. For instance, as of April 1, 2025, the federal homestead exemption protects up to $31,575 of equity in a primary residence. If a married couple files jointly, they can double this exemption amount.

Other exemptions, such as the “wildcard exemption,” can be used to protect various types of property, including potentially additional home equity. The federal wildcard exemption, for example, allows debtors to protect a certain amount of value in any property, including cash or other assets not covered by specific exemptions. As of April 1, 2025, the federal wildcard exemption is $1,675 plus up to $15,800 of any unused portion of the federal homestead exemption. This can be useful if the homestead exemption alone does not fully cover the home’s equity.

To determine if a home has non-exempt equity, the debtor’s equity is compared against the available exemption amount. The calculation involves taking the home’s current market value and subtracting any outstanding secured debts, such as the mortgage. If the resulting equity is fully covered by the homestead and any applicable wildcard exemptions, the home is protected from liquidation by the trustee. If the equity exceeds the available exemptions, the trustee may sell the home, distribute the exempt portion to the debtor, and use the remainder to pay creditors.

Managing Your Mortgage Debt

Once the question of protecting home equity through exemptions is addressed, debtors must consider their ongoing mortgage obligations. Chapter 7 bankruptcy discharges personal liability for debts, but it does not automatically eliminate the lien on a secured asset like a home. This means the mortgage lender still has a legal claim to the property if payments are not maintained. Debtors have several options for managing their mortgage debt in Chapter 7.

One option is a reaffirmation agreement. This is a legally binding contract where the debtor agrees to remain personally responsible for the mortgage debt, even after the bankruptcy discharge. By reaffirming, the original terms of the mortgage loan continue, and the debtor retains personal liability for the full amount. The process involves filing a formal agreement with the court, which may require court approval to ensure it does not create an undue hardship for the debtor. Reaffirming allows the debtor to keep the home and continue building credit by making timely payments, and it can facilitate future refinancing or loan modifications.

Another option, though less common for real estate, is redemption. Redemption allows a debtor to pay the secured creditor the current fair market value of the collateral in a single lump sum, rather than the full amount of the debt owed. While redemption is used for personal property like vehicles that are worth less than the loan balance, it is not applicable to real estate. This is because real estate is not considered personal property in this context, and obtaining a lump sum payment for a home’s value can be challenging.

Finally, a debtor can choose to surrender the home. If the debtor decides not to keep the property, they can surrender it to the secured creditor through the bankruptcy process. Surrendering the home means the debtor gives up their ownership, and their personal liability for the mortgage debt is discharged in the bankruptcy. While the personal debt is eliminated, the lender still retains its lien on the property and can proceed with foreclosure. This option is chosen when the debtor cannot afford the mortgage payments, the home has little or no equity, or they no longer wish to own the property.