Can You Keep Your Home When Filing for Chapter 7 Bankruptcy?

 

Whether you can keep your home when filing for Chapter 7 bankruptcy depends on several factors, including the amount of equity in your home, your ability to keep up with mortgage payments, and the specific bankruptcy exemptions available in your state. Here’s a detailed look at how these factors play a role:

Factors Affecting Your Ability to Keep Your Home

1. Home Equity and Exemptions
   • Equity: Equity is the difference between your home’s market value and the amount you owe on your mortgage. In bankruptcy, the trustee can sell your non-exempt assets to pay creditors, so whether your home equity is protected is crucial.
   • Exemptions: Bankruptcy exemptions allow you to protect a certain amount of equity in your home. These exemptions vary by state and can be critical in determining whether you can keep your home.

   Example:

   • Federal Homestead Exemption: Under federal law, you can protect up to $27,900 of home equity (as of 2023). Some states have higher or lower exemptions, and some states do not allow you to use the federal exemption.
2. State-Specific Exemptions
   • Homestead Exemptions: Many states offer a homestead exemption that protects a portion of your home equity. The amount varies widely; for example, in Florida, the homestead exemption can cover the entire value of your home, while in California, the exemption can be up to $600,000 depending on various factors.

   Example:

   • Texas: Texas offers an unlimited homestead exemption for homes on up to 10 acres in a city or 100 acres in rural areas.
3. Mortgage Payments
   • Current Payments: To keep your home, you must continue making mortgage payments. If you are current on your payments and your equity is fully covered by an exemption, you are more likely to keep your home.
   • Reaffirmation: You may need to reaffirm your mortgage debt, which means you agree to continue paying the mortgage after the bankruptcy, excluding it from discharge.
4. Lien Avoidance and Redemption
   • Lien Avoidance: If a creditor has a lien on your home for unsecured debt, it may be possible to avoid the lien and protect your equity.
   • Redemption: In some cases, you can redeem your home by paying the current market value in a lump sum, which can be an option if you have significant non-exempt equity but have the means to cover the lump sum.

Practical Scenarios

1. High Equity, Low Exemption:
   • Scenario: Suppose you have $100,000 in home equity, but your state’s homestead exemption only covers $30,000.
   • Outcome: The trustee may sell your home, pay off the mortgage, give you the exempted amount, and use the remaining equity to pay your creditors.
2. Low Equity, High Exemption:
   • Scenario: You have $20,000 in home equity, and your state allows a $50,000 homestead exemption.
   • Outcome: Your equity is fully protected, and you can likely keep your home, provided you stay current on mortgage payments.
3. Underwater Mortgage:
   • Scenario: You owe more on your mortgage than your home is worth (negative equity).
   • Outcome: The trustee is unlikely to sell the home since there is no equity to benefit creditors. You can typically keep the home if you continue making mortgage payments.

Steps to Take

1. Consult with an Attorney: An experienced bankruptcy attorney can help you understand your state’s exemptions and determine the best strategy to protect your home.
2. Review Your Mortgage: Ensure you are current on your mortgage payments and discuss reaffirmation options with your attorney.
3. File for Exemptions: Accurately file for all available exemptions to protect as much equity as possible.
4. Consider Lien Avoidance or Redemption: Explore options for avoiding liens or redeeming your home if applicable.

 

Keeping your home in a Chapter 7 bankruptcy largely depends on your home equity, the available exemptions in your state, and your ability to continue making mortgage payments. While it is possible to retain your home through careful planning and understanding of the legal provisions, consulting with a qualified bankruptcy attorney is essential to navigating this complex process effectively.

 

Chapter 7 Bankruptcy