Can You File Bankruptcy and Keep Your House?

Will I Lose My House in Bankruptcy?

Many people are able to successfully file bankruptcy without losing their homes.

Whether you’ll lose your house in bankruptcy depends on a few key factors, including:

• What type of bankruptcy you file (Chapter 7 or Chapter 13)

• How much equity you have in your home

• Whether you’re up to date and able to keep up with your mortgage payments

If you’re a homeowner, it’s advisable to hire a bankruptcy lawyer to help you file your case so you can be sure to protect your home. Many offer free consultations so you can get a sense of what their fees will be and whether you’ll work well together. If you own a home, you won’t be eligible to use Upsolve’s free filing tool.

Chapter 7 Bankruptcy and Your Home

If you’re filing Chapter 7 and want to keep your home, you’ll first need to be sure you’re up to date on your payments. Then, you’ll need to check your state’s bankruptcy exemptions. Every state has its own homestead exemption, which allows you to protect a certain amount of equity in your primary residence. To calculate your equity, subtract what you still owe on the home from its current fair market value. 

If your home’s equity is below your state exemption limit, you can likely keep your home as long as you continue making mortgage payments. But if your equity exceeds the exemption limit, the bankruptcy trustee has the right to sell your house, pay off the mortgage, and use the remaining equity to pay off your creditors. You would get the exempted portion of the equity back.

Some states have generous exemptions that can fully protect your home, while others offer less protection. Find a complete list of exemptions by state in this article.

Will the Chapter 7 Bankruptcy Trustee Take Your Home?

The bankruptcy trustee might take your home if its equity is more than the homestead exemption allowed in your state. This is why Chapter 7 is sometimes called liquidation bankruptcy.

The trustee’s role is to sell non-exempt property, like cars, jewelry, or real estate, to pay off unsecured creditors. Whether your home is safe depends on its market value and how much of its equity is protected by your state's homestead exemption.

To see if you have non-exempt equity, start with your home’s market value. Then, subtract the amount you owe on your mortgage and the homestead exemption you’re allowed to claim. If there’s any equity left after those deductions, the trustee can use it to pay off your unsecured creditors.

Chapter 13 Bankruptcy and Your Home

In Chapter 13 bankruptcy, the process is different. Many people opt to file Chapter 13 over Chapter 7 if they’re behind on their monthly payments and need time to catch up.

Chapter 13 includes a payment plan where you pay off your debts over 3–5 years. As long as you can keep up with your mortgage payments and follow the terms of your repayment plan, you can generally keep your home.

Exemptions are still important in Chapter 13 because they help determine how much you need to repay unsecured creditors. But unlike Chapter 7, the trustee won’t sell your property if your home equity exceeds the exemption limit. Instead, you may have to pay a bit more toward your unsecured debts through the repayment plan.

What If You’re Behind on Mortgage Payments?

If you’ve fallen behind on your mortgage, you have a few options. If you’re experiencing a temporary hardship, you can start by contacting your mortgage company and telling them there’s been a change in your financial situation. Many mortgage lenders have programs that are designed to provide relief and prevent foreclosure. This could include:

• Loan modification, which adjusts the terms of your mortgage loan to lower payments

• Forbearance plans, which temporarily reduce or pause payments

• Repayment plans, which spread out overdue amounts over time

Filing for bankruptcy could also give you a chance to catch up on payments. 

Catching Up Your Mortgage in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is often the best option in this case, as it allows you to spread out past-due payments over the course of your repayment plan while also keeping up with current payments. This can stop foreclosure as long as you stick to the plan. You can take up to five years to catch up on your missed payments. But your monthly income must be enough to cover both the plan payments (to catch up your home loan) and the regular monthly mortgage payments going forward. 

In Chapter 7, you usually can’t keep your home if you’re behind on payments because the process doesn’t include a repayment plan. The lender may proceed with foreclosure unless you can catch up on missed payments quickly.

Again, it’s a good idea to get legal advice from an experienced bankruptcy attorney if you have any questions or concerns about how to protect your home while filing bankruptcy.

In addition to standard repayment plans, there are programs designed to assist homeowners further.

Mortgage Modification Mediation in Chapter 13 Bankruptcy

Many bankruptcy courts have established a mortgage modification mediation program to provide assistance to homeowners going through a Chapter 13 bankruptcy. It can’t force the bank to do anything the bank isn’t already doing. What it does do is streamline the process. 

You’ll still have to submit certain documents and information, but everything is handled through an online portal all participants have to use. Once you submit the paperwork, the bank will review everything to determine whether you meet the criteria for any of their modification programs. 

If you don’t, a mediation is scheduled. With the help of a mediator, you can find out exactly why you don’t meet the qualifications and what you can do to change the outcome, if anything.  

Sometimes Filing Bankruptcy Can Make Paying Your Mortgage Easier

Your bankruptcy discharge wipes out almost all unsecured debts — medical bills, credit card payments, personal loan payments, etc. Reducing or eliminating your debt payments can free up money to focus on your other bills like your mortgage payment, utilities, and other living expenses.

This is also true for renters. Rent will always need to be paid, just like a mortgage, electricity, water bills, and other utilities. But as soon as the automatic stay kicks in, you'll be protected from debt collectors.

Again, it’s important to protect yourself during the bankruptcy process. If you’re a homeowner, this likely means getting professional help with your bankruptcy case. If you can file for bankruptcy and protect your home, you can set yourself up for a better financial future.

Bankruptcy vs. Other Debt Relief Options

Bankruptcy can be an important lifeline for many people, but it’s not right for everyone. It’s always a good idea to explore all your debt relief options. If you want some personalized guidance on what options you’re eligible for, you can take Upsolve’s screener now.

Your other debt relief options include:

• Budgeting and debt repayment through the debt snowball or debt avalanche methods

• Debt consolidation

• Debt settlement

• Debt management plan

Budgeting

If you have a manageable amount of debt, budgeting and committing to a debt repayment plan may be all you need to get back on track. There’s no hard-and-fast rule defining what a manageable amount of debt is. But often if you have over $10,000 in high-interest credit card debt and don’t have a very high income, you may need to try another debt relief option. That’s because high-interest debt mounts fast, and it can be challenging to repay it even if you have great budgeting skills.

Debt Consolidation

Debt consolidation isn’t usually an option for mortgage debt, but if you’re struggling to keep track of your other debt payments and want to lower your interest rate, you can look into a debt consolidation loan or a credit card balance transfer (usually to a card with a 0% introductory APR). The biggest advantage of debt consolidation is that it moves all your debt into one place and can save you money over time with a lowered interest rate. The biggest drawback is that you usually need to have a good credit score to get a consolidation loan.

Some people opt to take out a second mortgage or home equity line of credit (HELOC) to help repay other debt. Approach this with caution as it turns unsecured debt into secured debt and can put your home at risk if you aren’t able to pay on the loan.

Debt Settlement

You can’t typically settle your mortgage debt, but debt settlement may be an option if you’re behind on credit card bills or medical debt. You usually need to have access to a lump sum of money to successfully settle a debt. Debt settlement can clear your debt for good, but it will probably hurt your credit score and may require good negotiation skills.

Debt Management Plan 

Again, you can’t usually include mortgage debt (or other secured debts) in a debt management plan (DMP). But a DMP can be a great way to address unsecured debt like credit cards. Like a Chapter 13 plan, a DMP is a 3–5-year repayment plan. It’s facilitated by a nonprofit credit counselor who will also contact your creditors to try to reduce your interest rates. This means you usually pay less over time under the DMP.

The downsides of a DMP are that you usually have to close the accounts you include in the plan, which can temporarily decrease your credit score. Also, not all types of debt can be included in a DMP.

Let’s Summarize…

If you’re a homeowner, it’s important to consider how your home will be impacted by filing bankruptcy. If the equity you have in your home is less than the available bankruptcy exemption in your state, you can usually get a fresh start and keep the home. You may be able to keep your home in Chapter 7 and Chapter 13, but you’ll need to research which is the best option for you. If you file Chapter 7, you’ll need to be up to date on your mortgage payments as well. Because a home is such a valuable asset, it’s advisable to hire a bankruptcy lawyer to help with your case. You can schedule a free consultation with a lawyer near you to find a good fit.