Can You File Bankruptcy and Keep Your House?

The short answer is yes. In many cases, you can file bankruptcy and keep your house. The longer answer is that it depends on a few key factors, such as how much equity you have in your home, and how your state laws treat that equity during bankruptcy.

In this article, we’ll break down what you need to know about keeping your house during bankruptcy, explain the role equity plays, and highlight some risks you should be aware of, plus offer solutions that many people don’t realize exist.

Equity Is Everything

Let’s start with a definition of equity. Equity is simply the difference between what your home is worth and what you still owe on it. So if your home is worth $250,000 and your mortgage balance is $200,000, you’ve got $50,000 in equity.

Now, when it comes to bankruptcy, whether you get to keep your home depends on how much of that equity is protected by your state’s exemption laws. These laws decide how much of your home’s value is off-limits to creditors during bankruptcy.

For example, some states might let you protect up to $150,000 in home equity, while others cap it at $40,000 or even less. That makes a big difference. If you have $75,000 in equity and your state only protects $50,000, the remaining $25,000 could be fair game in a Chapter 7 bankruptcy.

If your home is worth $250,000 and your mortgage balance is $275,000, you’re underwater on your mortgage, meaning you owe more than the home is currently worth.

This matters in bankruptcy because equity is what the court looks at when deciding whether your home can be protected. If you have little or no equity, there’s usually nothing for creditors to go after, which means keeping your home is much more likely. But if you have a lot of equity, there’s a lot for creditors to go after, which makes it trickier to keep your home.

In a lot of places, home values have gone way up, but the exemption amounts haven’t kept pace. Imagine someone who bought a home in 2018 for $180,000. Thanks to rising prices, that home might be worth $300,000 now. If they’ve paid down their mortgage to $200,000, they’ve got $100,000 in equity, much more than they planned on. If their state only protects $50,000 of that equity, their home could be at risk.

How to Keep Your Home and Car in Chapter 7 or 13 Bankruptcy

Chapter 7 vs. Chapter 13: The Key Difference

To understand what happens to your house in bankruptcy, you need to know which chapter you’re filing under: Chapter 7 or Chapter 13.

Chapter 7 (Liquidation Bankruptcy)

In Chapter 7, a court-appointed trustee has the right to sell any assets that aren’t protected by exemptions, including your home. If you have a lot of equity and your exemption doesn’t cover it, the trustee may sell your home to repay your creditors.

That said, most people don’t lose their homes in Chapter 7. If you don’t have a lot of equity, or your state’s exemptions are generous enough, you’re typically in the clear. But it’s essential to get an accurate market valuation of your home before you file.

And even then, there’s a risk. As Michigan bankruptcy attorney Matthew Fry points out, trustees are allowed to put a for-sale sign in your yard and test the market. One of his clients lost their home in Chapter 7 because a neighbor’s child overpaid by $60,000, well above the initial appraisal. The sale was legal, and the client had no choice.

Chapter 13 (Reorganization Bankruptcy)

If you’re worried about losing your house in Chapter 7, Chapter 13 might be a better path. Chapter 13 allows you to keep your home while repaying some or all of your debt over time.

Here’s how it works:

• You propose a 3- to 5-year repayment plan based on your income.
• Any non-exempt equity in your home gets factored into what you pay back over that period.
• You stay in your home as long as you make the plan payments.

Chapter 13 also lowers your interest rates on things like car loans (to prime plus 3%), which can make the repayment more manageable. And unlike Chapter 7, your house isn’t up for grabs. Even if you have more equity than your state exemption allows, you won’t lose your home—you’ll just pay that portion back over time.

How to Buy a Home After Bankruptcy (Even with Low Credit)

The Role of Your Mortgage

Equity isn’t the only issue. You also need to be current on your mortgage (or have a plan to catch up).

• In Chapter 7, if you’re behind on your mortgage and can’t catch up quickly, your lender can foreclose, even if the bankruptcy discharges your other debts.
• In Chapter 13, you can include mortgage arrears in your repayment plan and avoid foreclosure.

Bottom line: Chapter 13 offers more flexibility if you’ve fallen behind on your mortgage payments.

So, Can You File Bankruptcy and Keep Your Home?

Whether you can keep your home in bankruptcy comes down to a few questions:

• Do you have equity in your home?
  If yes, how much is protected under your state’s laws?

• Are you current on your mortgage?
  If not, do you have the income to catch up in Chapter 13?

• Are you okay with some risk?
  Even with all the right paperwork and valuations, Chapter 7 can still carry surprises.

If your state protects little equity or if your home value has shot up recently, you may want to proceed with caution, and likely avoid Chapter 7 altogether.

What About Car Loans?

Home ownership isn’t the only concern. For many, their vehicle is just as vital for survival. The good news is that you can almost always keep your car, but you might not want to. Read this article for more details.

The Bottom Line: There Is a Way Forward

You can file bankruptcy and keep your house. You can keep your car. But these outcomes depend on getting the right guidance

The bankruptcy system is designed to give you a fresh start, not punish you. If you’re drowning in debt and afraid of losing your home, talk to a professional. Get the facts. Know your options. Because staying stuck in debt out of fear may cost you more than bankruptcy ever will.