Whether you can keep your home in Chapter 7 bankruptcy depends on how much equity you have in the home, the amount of homestead exemption available to you, and whether you are current on your mortgage. Even if you won't lose your home in bankruptcy, you should consider whether you can afford your home in the long run. If not, you may want to surrender your home in bankruptcy for tax purposes.
Equity and the Homestead Exemption
You can keep your home in Chapter 7 bankruptcy if:
- you don't have any equity in your home, or
- your equity is covered by your homestead exemption.
Figuring out the amount of your equity. You can determine the amount of equity in your home (if any), by subtracting all mortgages and liens on your home from the current market value of your home (what it would sell for today). If you get a negative number, you don't have any equity and you won't lose your home through bankruptcy. If you get a positive number, that's the amount of your equity.
The homestead exemption. Homestead exemptions protect a certain amount of equity from the reach of the bankruptcy trustee. Most states protect at least some equity in your primary residence. A few states protect your entire home, regardless of how much equity you have. The federal exemptions protect up to $21,625 (double that if you are married and file jointly) in your primary residence.
Doing the math. Compare your home equity to your applicable homestead exemption. If the homestead exemption covers all of your equity, you get to keep your home. If you have equity left over after applying the homestead exemption, you are at risk of losing your home. If the difference is small, the trustee may decide it's not worthwhile to sell your home, especially if the costs of sale will eat up any remaining equity. Or, you may be able to use part of another exemption (such as a wildcard exemption) to tip the equity-homestead balance in your favor. Another option is to pay the trustee for the nonexempt equity or give up some nonexempt property in exchange for keeping your home.
If You Are Not Current on Mortgage Payments
If you are in arrears or facing foreclosure, Chapter 7 bankruptcy does not provide a way for you to catch up. So, unless you can negotiate something with your lender independently from the bankruptcy, you will most likely lose your home. Here's why.
When you complete a Chapter 7 bankruptcy, your debts are discharged. This includes your mortgage debt. However, even though you are no liable for your mortgage, the lender still has a lien against the property (Chapter 7 bankruptcy does not get rid of liens). So, if you stop paying your mortgage, the lender is legally allowed to foreclose on your property.
The Automatic Stay Provides Temporary Help Only
Your lender will be prevented from continuing with foreclosure proceedings by bankruptcy's automatic stay. The stay begins once you file your bankruptcy petition. However, your lender can ask the court to remove the stay so that it can continue with the foreclosure. The court is likely to do so if you are behind in your payments and will lose your home eventually.
Tax Advantages to Letting the Foreclosure Happen Before the End of Bankruptcy
If you lose your home through foreclosure after your bankruptcy case is closed, you may end up with a hefty tax bill. If you lose your home through foreclosure right before or during your Chapter 7 case, you may save a bundle.
Using Chapter 13 Bankruptcy
If you want to catch up on back mortgage payments, you can do this through Chapter 13 bankruptcy.
Other Ways Chapter 7 Can Help Save Your Home
If you are current on your mortgage, but making payments is a struggle, Chapter 7 can get rid of other debt which frees up money you can then devote to your house payments.