The question of whether you can keep your home when filing for bankruptcy under Chapter 7 depends on how much equity you have in your home. If you have substantial equity, the bankruptcy trustee may sell your home to pay creditors. On the other hand, if you do not have much equity, you have a stronger chance of keeping your home. You still may face foreclosure if you have not kept up with your mortgage payments, but this is a separate process from bankruptcy.
The volatility of the real estate market can complicate the question of how much equity you have in a home. If the market is weak, you may be able to cover any equity with bankruptcy exemptions under state or federal laws and keep your home. If the real estate market is surging, however, your equity may rise to a level at which you can no longer cover it with exemptions.
Using the Homestead Exemption
If the full equity that a filer holds in their home is less than the applicable homestead exemption (and they are not behind on mortgage payments), their home will not be sold.
One common type of bankruptcy exemption is the homestead exemption, which usually applies to a debtor’s primary residence. It can apply to only one piece of property. The exemption usually accounts for a certain value of property, but occasionally it will account for a certain size of property. States vary dramatically in the value or size of their homestead exemptions, and federal law provides its own homestead exemption. Some states allow you to choose between the state exemptions and the federal exemptions.
The amount of the homestead exemption may depend on how long you have lived in the state and how long you have owned your home. If you have lived in a state for at least 730 days (two years), you can use the exemptions of that state. However, if you have not lived in your current state of residence for two years, you will need to use the exemptions of the state where you lived for the majority of the 180-day period (six months) before the last two years. If you have owned your home continuously for the last 40 months, you can apply the full amount of the exemption to its equity. A home that a debtor has owned for a shorter period may be eligible for only a limited amount of the exemption. These rules are very technical and can change over time, so you may want to consult an attorney to understand how they apply to your situation.
Will Your Home Be Sold?
Determining whether your home will be sold based on any unprotected equity involves a calculation of its fair market value. Once you have determined this amount, you should subtract the amount of your homestead exemption, the trustee’s commission on the remaining value of the home, the cost of selling the home, and any mortgages and liens secured by the home that need to be paid off. If the total subtracted amount is greater than the fair market value of your home, the bankruptcy trustee will not find it worthwhile to sell your home. A sale would not produce payments for creditors. Otherwise, the bankruptcy trustee likely will sell your home to pay off creditors and mortgage lien holders. You will be entitled to receive the amount of the homestead exemption from the proceeds of the sale.
Will the Sale Make a Profit?
A filer’s home may be sold if its sale would yield a profit after subtracting:
The homestead exemption
The trustee’s commission
The cost of selling the home
Any mortgages or liens secured by the home that must be paid
Chapter 7 and Foreclosure
Foreclosure should not be confused with bankruptcy. Whether or not you file for bankruptcy, you will lose your home to foreclosure if you fail to keep up with mortgage payments. Filing under Chapter 7 can help you delay a foreclosure, but it cannot prevent a foreclosure entirely. If you are able to file under Chapter 13 instead, you may be able to pay off your debt on the mortgage through the repayment plan in that form of bankruptcy. In other situations, a debtor may be able to work out a plan with the lender to modify or refinance the loan before they file for bankruptcy. You probably will not be able to negotiate with the lender once you have filed for bankruptcy.