One of the Biggest Fears About Bankruptcy
For most homeowners facing overwhelming debt, the prospect of losing their house is what keeps them from filing bankruptcy. The good news: it’s often possible to keep your home. The answer depends heavily on which chapter you file, your home equity, and your state’s exemption laws.
Chapter 7 and Your Home
In Chapter 7, keeping your home is possible if two conditions are met. First, your home equity must fall within your state’s homestead exemption limit. Second, you must be current on your mortgage payments.
Every state sets its own homestead exemption — the amount of home equity that’s protected from creditors. Some states have generous exemptions (Florida and Texas have unlimited homestead exemptions). Others cap it at $25,000 or less. If your equity exceeds the exemption, the trustee may sell your home to pay creditors.
If you’re current on mortgage payments and within exemption limits, you can reaffirm the mortgage (sign an agreement to remain personally liable) and keep the home as if bankruptcy never happened.
Chapter 13 and Your Home
Chapter 13 is the more powerful tool for homeowners in trouble. If you’re behind on mortgage payments, Chapter 13 lets you catch up on those arrears over the 3–5 year repayment plan while continuing to make current payments.
This “cure and maintain” approach stops foreclosure in its tracks the moment you file, thanks to the automatic stay. As long as you complete your plan and stay current going forward, you can keep the home.
Chapter 13 also has a useful tool called “lien stripping” — in certain situations, if you have a second mortgage and your home is worth less than the first mortgage balance, you may be able to remove the second mortgage entirely.
What Threatens Your Home Most
The situations most likely to cost you your home in bankruptcy: having equity that significantly exceeds your state’s exemption in a Chapter 7 case, falling behind on mortgage payments during a Chapter 13 plan, or failing to complete the Chapter 13 plan.
Acting before foreclosure proceedings are too far advanced is critical. Once a foreclosure sale date is set, your options narrow. Filing bankruptcy before that date triggers the automatic stay and buys time to figure out the best path forward.
Talk to an Attorney Before Assuming the Worst
Many homeowners avoid bankruptcy because they assume they’ll automatically lose their house. In reality, careful planning with a bankruptcy attorney can protect your home while eliminating crushing unsecured debt. Don’t make assumptions — get a consultation and look at the actual numbers for your specific situation.