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Your House

Of all the assets an individual may be concerned about losing when filing a bankruptcy, the status of one’s home  is usually most pressing.  Every state has a homestead exemption statute that sets forth how much equity you can keep in your home, while eliminating debts in a Chapter 7 bankruptcy case.  In some states, the homestead exemption is based on federal law.

Chapter 7 bankruptcy filers can keep their homes if they are current on their mortgage payments and have a low amount of equity in your home.  If the home has significant equity that can be used by the trustee to pay unsecured creditors, the debtor can lose his/her home. Mostly, Chapter 7 bankruptcy debtors do not have enough nonexempt equity in their homes to trigger a sale, and therefore can keep their homes in bankruptcy.

Two steps to determine if your house will be sold by the trustee or not is:

  • Figure out the amount of your homestead exemption.  The state in which you file bankruptcy can play a large role in how your home is handled. Which exemption you can use depends on where and when you bought the home, whether the state where you are filing allows use of the federal exemptions, and whether you have moved within the last few years.
  • Determine if you have enough equity not protected by the homestead exemption in your home to trigger a sale in bankruptcy.

If you end up with a negative number, you do not have sufficient equity to trigger a sale. Therefore the chance of a bankruptcy trustee selling off your house is nil as there won’t be anything leftover to pay the unsecured creditors.  If the end product is a positive figure, the amount can be used by the bankruptcy trustee to pay your unsecured creditors. In such cases, the Chapter 7 bankruptcy trustee may sell your home, give you the amount of the homestead exemption, pay off mortgage and lien holders, and use the rest to pay off unsecured creditors.

In Chapter 7 bankruptcy, your mortgage is treated as a secured debt because the lender has a lien on your house. If you don’t pay your mortgage, it can enforce the lien by foreclosing on the house.

Inside Your House