If I Declare Bankruptcy, What Happens to My House?

A home is often an individual’s most significant financial asset, making its fate a primary concern during financial distress. While the prospect of losing a home to bankruptcy can be daunting, bankruptcy laws offer various options. The outcome for a homeowner depends on factors like the type of bankruptcy filed, home equity, and the ability to continue mortgage payments. Understanding these elements helps clarify the path forward for those navigating such challenging circumstances.

Impact of Bankruptcy Chapters on Home Ownership

The specific bankruptcy chapter chosen significantly influences how a home is treated. Chapter 7 and Chapter 13 bankruptcy offer distinct approaches, each with different implications for home ownership. Understanding how home equity and ongoing mortgage obligations are handled is a primary goal in either case.

In Chapter 7, or liquidation bankruptcy, a debtor’s non-exempt assets may be sold by a trustee to repay creditors. If a home has equity exceeding available exemptions, the trustee may sell the property. This involves liquidating the asset, paying secured liens, returning the exempt portion to the homeowner, and distributing remaining proceeds to unsecured creditors. However, many Chapter 7 cases are “no-asset” cases where home equity is fully protected by exemptions, allowing the debtor to keep their home if mortgage payments are current.

Chapter 13, or reorganization bankruptcy, allows debtors to retain assets, including their home, by proposing a repayment plan. This plan typically spans three to five years, with regular payments made to a trustee who distributes funds to creditors. Chapter 13 is beneficial for homeowners behind on mortgage payments who wish to keep their property. The repayment plan can include provisions to catch up on overdue mortgage payments (arrears) while requiring ongoing mortgage payments.

Using Exemptions to Protect Your Home

Bankruptcy exemptions determine which assets a debtor can protect from creditors. These statutory provisions allow individuals to shield a certain amount of value in specific types of property. The homestead exemption is most relevant for homeowners, designed to protect equity in a primary residence.

The availability and amount of the homestead exemption vary significantly depending on whether a debtor uses federal or state exemptions. Some states require state-specific exemptions, while others allow a choice. For cases filed on or after April 1, 2025, the federal homestead exemption protects up to $31,575 of equity in a principal residence. If a state’s exemption is more generous, or if the debtor’s equity falls within the federal limit, the home’s equity may be fully protected.

For example, if a home is valued at $300,000 with a $280,000 mortgage, the homeowner has $20,000 in equity. If the homestead exemption is $31,575, this entire equity is protected, and the home would not be subject to sale by a Chapter 7 trustee. However, if the home’s equity exceeds the exemption amount, the non-exempt portion could be at risk of liquidation. Some states also offer a “wildcard exemption” that can be applied to any property, including a portion of otherwise non-exempt home equity.

Managing Mortgage Debt and Other Liens

When bankruptcy is filed, the treatment of mortgage debt and other liens attached to the home is a key consideration. Mortgage debt is a secured debt, meaning the loan is backed by the property itself. While bankruptcy can discharge a debtor’s personal liability for the mortgage, the underlying lien on the property remains. This means the lender retains the right to foreclose if mortgage payments are not maintained.

In Chapter 7, debtors wishing to keep their home often enter a reaffirmation agreement with the mortgage lender. This voluntary contract means the debtor agrees to continue making payments on the mortgage debt, effectively opting out of the bankruptcy discharge for that obligation. This ensures the debtor remains personally liable for the debt, and the lender agrees not to repossess or foreclose as long as payments are made. If a debtor does not reaffirm the mortgage, personal liability is discharged, but the lien remains, allowing the lender to foreclose if payments cease.

Chapter 13 offers different mechanisms for managing mortgage debt and other liens. It allows debtors to cure mortgage arrears through a court-approved repayment plan over three to five years, which can prevent foreclosure. Chapter 13 also provides “lien stripping” for certain junior liens, such as second mortgages or home equity lines of credit (HELOCs). If the home’s value is less than the amount owed on the first mortgage, a junior lien can be reclassified as unsecured debt and potentially discharged upon completion of the Chapter 13 plan.

The Role of the Bankruptcy Trustee and Court Process for Your Home

The bankruptcy process involves specific procedural steps that directly affect a home’s fate. Upon filing a bankruptcy petition, an automatic stay immediately goes into effect. This injunction temporarily halts most collection activities, including foreclosure proceedings, providing immediate relief to the debtor.

In a Chapter 7 case, a bankruptcy trustee is appointed to administer the debtor’s estate. The trustee examines the debtor’s assets, such as the home, to determine if non-exempt equity can be liquidated for creditors. The trustee assesses the home’s value and reviews claimed exemptions to identify any unprotected equity. If the home’s equity is fully exempt, or if there is no equity, the trustee may abandon the property, leaving it to the debtor. If substantial non-exempt equity exists, the trustee may sell the home, distributing proceeds to creditors after accounting for the debtor’s exempt portion and secured liens.

For Chapter 13 cases, the process centers around the debtor’s proposed repayment plan. This plan details how debts, including mortgage arrears, will be repaid over the three to five-year period. The plan must be reviewed by the Chapter 13 trustee and approved by the bankruptcy court at a confirmation hearing. The trustee and creditors can object to the plan if it does not meet legal requirements or is not feasible. Once the plan is confirmed, the trustee oversees the distribution of payments to creditors. Upon successful completion of the Chapter 13 plan, the debtor receives a discharge, which can include the elimination of certain junior liens if they were stripped during the process.