Will I lose my house if I file bankruptcy?

The two questions that matter

How much equity do you have? Equity is what your house is worth minus what you owe on it. If your house would sell for $350,000 and you owe $310,000, you have about $40,000 in equity.

What is your homestead exemption? Every state lets people in bankruptcy protect a certain amount of equity in their home. That protected amount is the homestead exemption, and it varies wildly by state; the fifty-state table in this section gives you a first look at your number. If your equity is under the exemption, your house is not at risk from the bankruptcy itself.

If your equity is over the exemption, the answer gets more complicated, but it is still often “you keep the house.”

In Chapter 7

Chapter 7 is sometimes called liquidation, which sounds worse than it usually is. A trustee reviews your property and can sell anything that isn’t protected by an exemption to pay creditors. In most Chapter 7 cases nothing gets sold, because everything is exempt.

For a house, the trustee looks at your equity minus the exemption minus the cost of selling (real estate commissions and closing costs, often 6 to 8 percent of the price). If there is nothing meaningful left over for creditors, the trustee has no reason to sell. If there is a meaningful amount left over, the trustee can sell the house, pay you your exemption amount in cash, and distribute the rest.

The other half of Chapter 7 is the mortgage. Bankruptcy discharges your personal obligation on the loan, but it does not remove the lender’s lien. There is no free house in bankruptcy: if you want to keep it, you keep paying for it. If you are behind on the mortgage, Chapter 7 does not give you a way to catch up, and the lender can ask the court for permission to foreclose.

In Chapter 13

Chapter 13 is built for keeping property. Nothing is sold. Instead, you make payments through a three-to-five-year plan.

If you are behind on the mortgage, the plan lets you spread the missed payments over the life of the plan while you resume regular payments. This is the single most common reason people choose Chapter 13 over Chapter 7.

If your equity is over the homestead exemption, Chapter 13 still lets you keep the house. The trade is that your plan must pay unsecured creditors at least as much as they would have received if the trustee had sold the house in Chapter 7. For some people that makes the plan payment too high to be realistic. For many it is manageable.

When a house really is at risk

• You have substantial equity above your state’s exemption and file Chapter 7.
• You are behind on the mortgage, file Chapter 7, and cannot bring it current.
• You are behind on the mortgage and cannot afford a Chapter 13 plan that both cures the arrears and covers the ongoing payment.
• You have a second mortgage or home equity line that you cannot maintain.

Even in these situations, there are usually options: selling on your own terms before filing, a loan modification, or in some cases a Chapter 13 that strips a wholly unsecured second mortgage.

Things that change the answer

• Your state’s homestead exemption, and whether you have lived in the home long enough to use it.
• Whether the house is titled to you alone or jointly.
• Whether you’ve recently moved from another state.
• Whether you’re current on the mortgage and property taxes.