Bankruptcy is a last resort, and for good reason. The person who files can end up losing their assets and destroy their credit score for years to come. But it can also wipe the slate clean and help those who need it get back on their feet financially.
It’s possible to file bankruptcy and still keep your house. However, it’s not always a guarantee. Before filing, it’s a good idea to consult a bankruptcy attorney. They can assess the situation and advise you on your options, including whether you can keep your home.
Is it possible to file for bankruptcy and still keep your house?
Yes, it’s possible to file bankruptcy and still keep your home and certain other assets. Bankruptcy law is complicated, though, and not everyone qualifies for this option. That’s why it’s important to consult a law firm specializing in bankruptcy law first.
Things like the type of bankruptcy you file — chapter 7 or chapter 13 — and the amount of equity in your house can make a big difference in the outcome.
Along with this, you must meet certain conditions to be able to keep assets like a home. For example, you’ll need to be current on all mortgage payments and prove you can continue making payments.
When you file for bankruptcy, you’ll need to complete a bankruptcy petition. This is a stack of official forms that includes your:
- Debts and liabilities
- Assets (ex. home)
Depending on the case, a bankruptcy petition can make it easier to keep your house, while providing a fresh start. With that in mind, here’s an overview of some of the ways you can keep your house.
Bankruptcy basics: Chapter 7 and Chapter 13
There are two main types of personal bankruptcy: Chapter 7 and Chapter 13.
What happens next will depend on which option you choose.
Under a Chapter 7 bankruptcy, a trustee sells the nonexempt assets of the debtor (person filing) to pay creditors. Any remaining debts are discharged at the end of the case. Individuals with few to no assets who can’t repay their debts typically file a Chapter 7. Nonexempt assets include:
- House or property that’s not your primary home
- Paid off vehicle with equity
- Valuable collectibles such as art pieces
- Investments other than those in a retirement account
Individuals with assets and a solid income may choose to file for a Chapter 13 bankruptcy instead. In a Chapter 13, the court helps the debtor create a three to five-year repayment plan. This is often called a “wage earner’s plan” because it helps people with a regular income to consolidate their debts.
Under this plan, the debtor must make one monthly payment to their court-appointed trustee. The trustee will then pay any creditors on the debtor’s behalf. Any included debts can still accrue interest, often at a reduced rate. This may result in savings and make it easier to follow the repayment plan until it’s completed.
At the end of the plan, any remaining debts are discharged. That is, they are removed and no longer require repayment. A Chapter 13 bankruptcy lets the debtor keep most assets, including their home or other property.
With both types of bankruptcy, the court will issue an “automatic stay” order that remains in place until the case is closed. This keeps creditors or debt collectors from harassing you, repossessing property, evicting you, or garnishing your wages.
How to protect your home equity in a bankruptcy filing
In both a Chapter 7 and Chapter 13 bankruptcy, the debtor can protect their assets with a bankruptcy exemption. Every state has a specific list of exemptions. So, the property type and amount of equity you can keep varies widely. Common examples of exempt property include:
- Motor vehicles
- Personal property
- Social security payments
- Primary residence or real estate
To claim a bankruptcy exemption, fill out a Schedule C form and submit it to the bankruptcy court. Some states accept a federal bankruptcy exemption, while others require state-specific exemptions.
Only a few states will let you keep all of your home equity when you file bankruptcy. The majority have what’s known as a “homestead exemption” instead. This calculates the equity in your home to determine if it’s lower than the limit covered in the exemption. If it is, you can keep it all during the case. If it’s above the limit, you may only be able to keep some of the equity.
How to keep your home in Chapter 7 bankruptcy
A Chapter 7 is also called a “liquidation” bankruptcy. It’s simpler than Chapter 13 and takes an average of six months to complete. With it, you should be able to keep your home if you:
- Can protect the home equity with a bankruptcy exemption (check with your state)
- Are current on mortgage payments
- Have the financial means to continue to make mortgage payments for the foreseeable future
Things become more complicated when a home’s market value is worth more than the remaining balance on the mortgage loan. Normally, the bankruptcy trustee will be able to determine this. If the value is higher, they might sell it to pay off other debts.
However, if the equity is protected by a bankruptcy exemption or a homestead exemption, you may be able to keep the property. If the property is protected and there are no other saleable assets, then the Chapter 7 becomes a “no-asset” case.
Home equity in Chapter 7 bankruptcy
Home equity is the difference between the current mortgage balance and the property’s market value. If you were to sell a house with equity at market value, you would receive the difference.
When you file for a Chapter 7 bankruptcy, the trustee’s goal is to try to pay off as many unsecured debts as possible before they’re discharged. This includes things like medical debts or credit card debt.
If you have significant home equity, or if the exemption doesn’t cover it, the trustee can sell the property and use the proceeds to pay off these debts. Otherwise, you should be able to keep your home.
How long does Chapter 7 bankruptcy take?
Chapter 7 bankruptcy is faster than chapter 13 bankruptcy, but it still takes four to six months to complete.
What debt can be erased by Chapter 7?
The following debts are can be erased, or discharged, with a Chapter 7:
- Credit card debt
- Medical bills
- Car loans
- Personal loans and payday loans
- Judgments from credit cards and debt collection agencies
- Certain business debts
- Past-due utility bills
What debt can’t be erased?
Filing for a Chapter 7 cannot erase certain debts, particularly secured or federal debts. Even with an automatic stay, a debt collector or creditor can pursue payments for these debts. They can also sue the debtor to try to collect their money.
Debts that can’t be erased, or discharged, include:
- Child support
- Student loans (unless you can prove undue hardship)
- Tax-related debts
- Fines owed to the government
- Luxury purchases made with a credit card within 90 days of filing
Chapter 7 requires selling non-exempt assets
Typically, you’ll have to sell all nonexempt assets when you file for a Chapter 7 bankruptcy. The proceeds will then be used to pay off as many debts as possible. Nonexempt assets are generally those that aren’t required to maintain a certain standard of living. This includes:
- Vacation home or secondary residence
- Brand-new or luxury vehicles
- Musical instruments (ex. piano)
- Expansive collections like coins or artwork
- Antiques or family heirlooms
- Non-retirement investments
- Jewelry or other goods with resale value
- Designer clothing and shoes
Some states will let you keep certain items if you can prove you need them to work or maintain your home. This includes things like:
- Small amount of equity in a vehicle
- Household furnishings
- Clothing suitable for work (ex. suit)
- Tools or equipment needed for your profession
- Funds in retirement accounts
If you don’t have any nonexempt assets, as in no-asset cases, the trustee won’t liquidate (sell) any of your belongings.
Chapter 7 won’t help with past-due payments
If your home has a lot of equity, chances are the bankruptcy trustee will be able to sell it and use the proceeds to pay other debts. And, if you’re behind on mortgage payments, a Chapter 7 could mean losing the asset. In either case, Chapter 13 might be the better option if you want to keep your house.
How to keep your home in Chapter 13 bankruptcy
A Chapter 13 bankruptcy won’t require you to give up property. Instead, you’ll have to pay for the non-exempt portion of the home equity as part of the repayment plan.
Home equity in Chapter 13 bankruptcy
Nonexempt equity is any home equity that remains even after any exemptions. The more non-exempt equity you have, the higher amount you’ll have to repay. Because of this, you’ll need to prove you have enough income to pay the amount required in the repayment plan.
Here’s an example.
Say your current mortgage is $250,000 and has no equity. In that case, the entire amount is safe or exempt.
Now, say you owe $110,000 on your mortgage and have $90,000 in home equity. If you use an exemption of $50,000, the remaining $40,000 is nonexempt. With a Chapter 13 bankruptcy, you’ll need to pay that $40,000 to your creditors through the repayment plan.
Chapter 13 bankruptcy and past-due mortgage payments
With a Chapter 13 bankruptcy, you have a better chance of keeping your home than with a Chapter 7. This is especially true if you’re behind on mortgage payments and have a steady income.
You will, however, need to be able to make the monthly payments to your repayment plan to keep the property. Speak with a bankruptcy attorney to make sure you know exactly what this process entails.
Propose a repayment plan
With a Chapter 13 bankruptcy, you need to create a repayment plan that lets you pay your creditors in three to five years. It should take into account your income and debts or liabilities. You can treat your mortgage as a separate debt and add it to the repayment plan.
Typically, a lawyer will help you create this plan, which you can then present to the court. As long as neither the judge nor your creditors challenge it, you can then begin making payments. At the end of the agreed-upon timeframe, any remaining debts will be partially or fully eliminated.
Provide proof of sufficient income
To protect your home during bankruptcy, you’ll need to prove you have enough income to cover your monthly mortgage payments and repayment plan payments. Proof of income includes things like pay stubs, profit-loss statements, federal tax returns from previous years, and bank statements.
Once you’ve in a Chapter 13 bankruptcy, the mortgage holder can’t foreclose on the property if:
- You pay both your mortgage and repayment plan on time
- You meet all other mortgage requirements (ex. maintaining homeowner’s insurance and keeping up on property taxes)
Chapter 13 and junior liens
Some people who file for bankruptcy have a second or junior lien on their homestead (primary residence). If that’s the case, it might be possible to get rid of it through a process called “lien stripping.” This process only works if:
- You’ve successfully filed for a Chapter 13 bankruptcy
- The property is worth less than your primary loan balance
What happens to your mortgage when you file for bankruptcy?
Most real estate loans are secured debts. This includes:
- Home equity loans
- Home equity lines of credit (HELOCs)
When you get a mortgage, the lender will place a lien on the property that makes it secure. If you file for a Chapter 7 bankruptcy, you can get your remaining mortgage debt discharged. However, the lender can still take the home back via foreclosure due to the lien. With Chapter 13, you can keep your home as long as you can make the required payments.
How filing bankruptcy can make paying your mortgage easier
A bankruptcy discharge wipes out all or nearly all of your unsecured debts, including medical bills, credit card debt, and car loans. With fewer debts to worry about and no more debt collectors or creditors, you can focus on essential expenses like mortgage payments, utilities, and day-to-day costs.
Still confused about bankruptcy and your mortgage? Check this out to learn more:
What impact will bankruptcy have if I’m renting?
You’ll need to pay rent just as you would a mortgage. However, once the automatic stay from filing kicks in, debt collectors won’t be able to pursue payments or sue you.
The automatic stay can also prevent your landlord from evicting you. You will, however, have to set up a plan to catch up on any late payments. Before filing for bankruptcy, let your landlord know about your situation.
As long as you’ve kept up on payments during your initial lease, bankruptcy shouldn’t keep you from renewing your lease. Bankruptcy does lower your credit score, though. And, since most landlords conduct a credit check, it can be harder to rent somewhere new at first. If you do find a new place to live, expect to pay a higher deposit.
Which type of bankruptcy is best for you? It depends
If you’re current on your mortgage payments and don’t have a lot of home equity, it won’t really matter which bankruptcy you file. As before, you’ll need to keep making payments until the mortgage is paid off. You should also consult a bankruptcy attorney about any legal nuances.
That said, here are a few reasons why you might choose a Chapter 7 over a Chapter 13 bankruptcy or vice versa.
Reasons to choose Chapter 7
- Faster and simpler process
- Discharges most unsecured debts
- May put your home at risk if behind on payments
Reasons to choose Chapter 13
- Requires a repayment plan that takes three to five years
- Can give you time to catch up on late mortgage payments
- May make it easier to keep your home, though you’ll have to repay any nonexempt equity
What if I’m behind on my mortgage?
A lot of people who file for bankruptcy are behind on mortgage payments.
If you want to keep the house, a Chapter 13 bankruptcy might be better. This is because it involves a repayment plan that can help you catch up on payments. It also doesn’t require you to sell your assets.
If you don’t want to keep the house, you can surrender it with a chapter 7. This will let you discharge any remaining mortgage debt and give you a clean slate.
Other options for debt relief
Bankruptcy can destroy your credit score for seven to 10 years. Before filing, consider these alternatives.
Nonprofit credit counseling agencies exist to help people manage their finances and debts. They can also help you create a personal budget, improve your understanding of credit, and help you get your credit report.
Some also offer debt management plans (DMPs), which can be used to help pay off your creditors. With a DMP, you pay a set amount to the credit counseling agency each month, which they then disburse to your creditors. Meanwhile, the agency will work with your creditors to try to lower your interest rate or waive late payments.
This doesn’t always work, but it can make it easier to manage debts. You might, however, have to close any credit cards under the DMP.
Debt settlement is a little more extreme — and riskier — than credit counseling. With it, you’ll work with a for-profit debt settlement agency to try to reduce how much you owe.
This process doesn’t come with any guarantees and can result in late payments and a damaged credit score. It can also take multiple months or several years to complete. However, many people end up reducing what they owed by around 50% after paying agency fees.
Negotiate with your creditors
It’s possible to negotiate with your creditors on your own, too. If you’re already late on payments and can’t catch up, reach out to your creditors. Sometimes, they’ll be willing to negotiate on things like interest rates, late payments, or monthly minimums.
Be prepared to explain your situation, what changes you need and why, and how you plan to make payments in the future. If they agree to anything, get it in writing.
With debt consolidation, you can combine several high-interest debts into either a loan or a balance transfer credit card. The advantage here is that you might be able to reduce how much you pay in interest. You’ll also only have one payment to keep track of, which can make it easier to pay on time.
For the best rates and approval odds, you’ll need a good credit score and solid income, though. Also, this option usually only works for unsecured debts like credit cards or medical bills.
The bottom line
Depending on the type and how much equity you have, you may be able to file for bankruptcy and keep your home. Typically, a Chapter 13 bankruptcy is better for those who can afford a repayment plan and want to keep their home. A Chapter 7 bankruptcy, meanwhile, could be better if you’re on top of mortgage payments and can protect your home equity.
Either way, speak with a bankruptcy attorney before filing. They can inform you of any state laws and nuances you’ll need to know.
Retirement accounts are generally protected from bankruptcy. However, the account type, state law, and amount in each account can determine whether the funds are safe.
Check with your state government department or the U.S. Courts’ website on the current bankruptcy laws.
No, but it can increase your success rate. Before filing, it’s advisable to consult with a bankruptcy attorney. If you choose to file alone, or “pro se,” make sure you understand the United States Bankruptcy Code and the Federal Rules of Bankruptcy Procedure first.