What Happens to My House If I File for Bankruptcy?

Filing for bankruptcy offers financial relief for those with overwhelming debt. For homeowners, this often raises concerns about their home’s fate. This article clarifies the general implications of bankruptcy on a home, covering different bankruptcy chapters, equity, and mortgage obligations.

Bankruptcy Types and Your Home

Chapter 7 and Chapter 13 are the most common bankruptcy types. Chapter 7 involves a trustee overseeing the sale of non-exempt assets. If equity exceeds applicable exemptions, the trustee may sell the property.

Conversely, Chapter 13 allows individuals with regular income to create a three-to-five-year repayment plan. Under this plan, debtors generally retain their assets, including their home. Chapter 13 is often preferred by homeowners with significant equity or mortgage arrears, as it allows them to keep their home while restructuring finances.

Home Equity and Exemptions

Home equity is the portion of a home’s value a homeowner owns. Bankruptcy exemptions protect assets from seizure by creditors or a trustee. For homeowners, the homestead exemption shields a specific amount of equity in their primary residence.

Homestead exemption amounts vary significantly across the United States. Debtors typically choose between federal or state exemptions, opting for the system offering greater asset protection. For example, the federal homestead exemption allows a debtor to protect up to $31,575 of equity for cases filed on or after April 1, 2025, doubling to $63,150 for married couples filing jointly. Some states offer much higher exemptions, potentially protecting hundreds of thousands of dollars or even the entire value of a primary residence.

If a homeowner’s equity falls below the applicable exemption, the home is fully exempt, and a Chapter 7 trustee typically cannot sell it. If equity exceeds the exemption, the home becomes a non-exempt asset subject to sale by the trustee. Understanding these exemption limits is important for homeowners considering bankruptcy.

Managing Your Mortgage During Bankruptcy

Managing mortgage debt in bankruptcy depends on the chapter filed and the homeowner’s intentions. One option to keep the home and remain personally responsible for the mortgage is a reaffirmation agreement. This legally binding contract, signed during bankruptcy, obligates the debtor to continue payments on a specific debt even after other debts are discharged.

Alternatively, a homeowner may choose to surrender the property to the lender, especially if the home has little equity, significant mortgage arrears, or the homeowner no longer wishes to retain it. When a home is surrendered, the debtor’s personal liability for the mortgage debt is discharged in bankruptcy, meaning the lender cannot pursue them for any deficiency balance if the sale of the property does not cover the full amount owed. The lender then proceeds with foreclosure, but the homeowner is relieved of the financial burden. This can be a practical solution for those burdened by an underwater mortgage or unaffordable payments.

In a Chapter 13 bankruptcy, the treatment of a mortgage often involves curing existing defaults and restructuring payments. The Chapter 13 plan allows homeowners to catch up on missed mortgage payments, known as arrears, over the life of the plan, typically three to five years. This “cure and maintain” approach requires the debtor to make their regular ongoing mortgage payments while simultaneously paying off the arrears through the Chapter 13 plan payments. Chapter 13 can also offer a unique benefit for homeowners with junior liens, such as second mortgages or home equity lines of credit. If the value of the home is less than the balance of the first mortgage, these junior liens may be “stripped off” or reclassified as unsecured debt and potentially discharged at the end of the plan, effectively eliminating them from the property.

Impact on Foreclosure Proceedings

Filing for bankruptcy immediately triggers an “automatic stay,” a federal injunction halting most collection activities, including foreclosure. This stay takes effect the moment the petition is filed, providing immediate relief and an important pause in any ongoing or impending foreclosure action. It can temporarily stop a scheduled foreclosure sale, allowing the homeowner to remain in the property while the bankruptcy case progresses.

While the automatic stay provides immediate protection, its long-term effect on foreclosure varies between Chapter 7 and Chapter 13. In a Chapter 7 case, the stay is generally temporary for secured creditors like mortgage lenders. Unless the debtor reaffirms the mortgage or the property is fully exempt and payments continue, the lender can eventually petition the bankruptcy court for relief from the automatic stay. If granted, the lender can resume foreclosure. The Chapter 7 discharge eliminates personal liability for the mortgage but does not remove the lender’s lien on the property.

In contrast, a Chapter 13 bankruptcy often provides a more permanent solution to halt foreclosure. The automatic stay remains in effect as long as the debtor adheres to the terms of their approved repayment plan. By including mortgage arrears and making regular ongoing mortgage payments, the debtor can prevent foreclosure and retain their home. If the debtor fails to make plan payments or regular mortgage payments, the lender can again seek relief from the automatic stay, potentially leading to the resumption of foreclosure. Successful completion of the Chapter 13 plan is important for homeowners to permanently avoid foreclosure and retain their property.