Homestead Exemption 101: How It Works in Bankruptcy

Can Bankruptcy Help You Keep Your Home?

One of the biggest worries people have about filing bankruptcy is whether they’ll lose their home. 

The good news is that many homeowners are able to keep their houses thanks to something called the homestead exemption. This helps protect the equity in your home when you file Chapter 7 bankruptcy. 

In some states, the exemption is large enough to protect a home completely. In others, it may only cover part of the equity. 

In this article, you’ll learn how the homestead exemption works, when it can protect your home, and what options people explore when it’s not enough.

What Is a Bankruptcy Exemption?

A bankruptcy exemption is a legal protection that helps you keep certain types of property when you file Chapter 7 bankruptcy. Federal and state laws both offer exemptions, and each state has its own rules about which set you can use.

Exemptions protect personal property like your car, household goods, work tools, and clothing. They can also protect real property like a home or land you own. Some exemptions even cover intangible property like retirement accounts, personal injury settlements, or a life insurance policy.

There’s also something called a wildcard exemption in many states, which can be used to protect anything you choose, including extra home equity.

Chapter 7 bankruptcy is a powerful form of debt relief because it wipes out credit card debt, medical bills, and other unsecured debts. 

What Is the Bankruptcy Homestead Exemption?

The homestead exemption protects the equity in your primary residence. In some states, it also covers mobile homes or manufactured homes.

💡Equity is the part of your home’s value that you actually own—it’s the home’s market value minus what you still owe on your mortgage.

The homestead exemption can’t typically be used to protect rental properties, vacation homes, or other real estate you may own. 

Homestead exemption rules can vary a lot depending on where you live. For example some states offer unlimited protection, while others have a strict dollar limit. Some states increase the exemption for married couples, while others don’t.

A small number of states, including New Jersey and Pennsylvania, don’t have a homestead exemption at all. If your state doesn’t have a homestead exemption and you’re allowed to use the federal exemption instead, that may still give you some protection.

How Much Equity Can the Homestead Exemption Protect?

The homestead exemption amount only needs to cover your equity in the home, not the home’s full value. 

🏠Equity is what’s left over after subtracting your mortgage (and any other loans tied to the property) from the home’s market value.

For example, if your house is worth $200,000 and you still owe $180,000 on the mortgage, your equity is $20,000. If your state’s homestead exemption covers that $20,000, your house should be protected in Chapter 7.

State vs. Federal Homestead Exemptions

Every state sets its own exemption laws. Some states let you choose between using the state exemptions and the federal bankruptcy exemptions. Others require you to use the state’s list.

The federal homestead exemption protects $31,575 in home equity for individual filers or $63,150 if you're filing jointly with your spouse. 

The federal homestead exemption amount is updated every three years. It was last updated April 1, 2025.

What If Your Home Equity Is Higher Than the Exemption?

If you’ve built up a lot of equity and your state’s homestead exemption doesn’t cover all of it, filing Chapter 7 could put your home at risk. In that case, the bankruptcy trustee may choose to sell the home, pay off your mortgage, and use the leftover equity to repay creditors.

That said, most people who file Chapter 7 don’t lose any property. Many review their situation ahead of time or talk to a bankruptcy lawyer before moving forward. Most bankruptcy attorneys offer a free consultation.

If your home equity isn’t fully protected and you still want to keep your house, some people choose to explore Chapter 13 bankruptcy instead. Others consider options like debt settlement or credit counseling. We cover each of these more in a later section.

Who Can Use the Homestead Exemption?

You can’t move to a new state just to get better bankruptcy protections. Federal law requires you to live in a state for at least 730 days (about two years) before using that state’s exemptions.

This rule exists to prevent people from relocating just to take advantage of a bigger homestead exemption. 

For example, someone who owns a $400,000 home in New Jersey (which has no state homestead exemption) might be tempted to move to Florida, which offers unlimited protection. But unless they’ve lived in Florida for two full years, they likely won’t be able to use Florida’s exemption.

Can You Use the Homestead Exemption To Stop Foreclosure?

The homestead exemption protects the equity in your home during bankruptcy, but it doesn’t stop a foreclosure if you’re behind on your mortgage. That’s because mortgage lenders are secured creditors. This means they have the right to take the home if the loan isn’t paid.

Filing your bankruptcy petition can temporarily delay a foreclosure through something called the automatic stay. But once the case ends (usually in a few months), the lender can resume foreclosure if you’re still behind on payments.

Some homeowners in this situation look into Chapter 13 bankruptcy instead. Chapter 13 sets up a 3–5 year repayment plan, which can give you time to catch up on missed mortgage payments while keeping your home.

Can You Still File Bankruptcy If Your Home Isn’t Fully Protected?

Yes, but it can get more complicated. If your home equity isn’t fully protected by the homestead exemption, you can still file a bankruptcy case, but it’s important to understand the potential risks. The best way to do that is by speaking with a bankruptcy attorney in your state. They’ll know both state and federal bankruptcy laws and be able to advise you about your specific situation.

Debt Relief Options That May Help You Keep Your Home

If your home equity goes over the exemption limit in Chapter 7, the bankruptcy trustee has the right to sell your house to pay your unsecured creditors. That’s why many homeowners in this situation explore alternatives.

Here are a few common paths:

• Credit counseling or a debt management plan: Nonprofit credit counselors can help you reorganize your debts into a more manageable payment plan. 

• Debt settlement: Some people try to settle unsecured debts — like credit cards or medical bills — to lower their overall payments. This doesn’t reduce what you owe on your mortgage, but it might free up enough cash to stay current on housing costs and avoid foreclosure.

• Chapter 13 bankruptcy: This option lets you keep your home and other property while paying back some or all of your debt over three to five years. Chapter 13 can be a good fit for people with high home equity or past-due mortgage payments who can stick to a strict budget for several years.

🚨 Some people consider selling their home before filing bankruptcy, especially if they’re worried about losing it in Chapter 7. But selling a home before bankruptcy can raise legal and timing issues. It’s a good idea to speak with a bankruptcy attorney before taking any steps like this. Upsolve can set you up with a free consultation with a local attorney.

Let’s Summarize…

If you’re thinking about filing bankruptcy and you own a home, the homestead exemption is one of the most important things to understand. It helps protect your home equity in a Chapter 7 case, but how much protection you get depends on your state’s exemption laws. Some states offer generous homestead protections, while others have strict limits or none at all.

Even if your home equity goes over the exemption amount, you’re not out of options. Many people in this situation look into Chapter 13 bankruptcy, debt settlement, or credit counseling to avoid losing their homes.