How to Protect Your Home in Bankruptcy

Many people considering filing for bankruptcy worry about losing their homes. Some could be facing foreclosure. Others might manage their mortgage just fine but don't want to file without being sure they won't lose their home in bankruptcy.

Bankruptcy offers helpful financial options, but not all filers can protect a home in bankruptcy. Keeping your home in bankruptcy will depend on several factors, including whether you file for Chapter 7 or 13, whether you can protect your home's equity with a bankruptcy exemption, and whether you're behind on your mortgage.

Chapter 7 Bankruptcy Offers Some Help to Struggling Homeowners

Chapter 7 eliminates qualifying debt within a few months of filing, quickly providing financial relief to people with minimal property and income. However, because Chapter 7 bankruptcy is a streamlined bankruptcy chapter, it doesn't provide long-term financial solutions or tools to help homeowners keep homes.

Even so, if you're facing foreclosure, filing for Chapter 7 can help by stopping foreclosure temporarily and giving you a few rent-free months in the home. Also, you won't owe anything after foreclosure because Chapter 7 erases mortgage debt. But that's about it.

Of course, only some people lose their homes in Chapter 7. You can keep your home if you're current on your house payment and meet other qualifications discussed below. Homeowners find it easier to make monthly mortgage payments after erasing credit card balances, medical bills, and other debts in the Chapter 7 case.

Learn more about keeping a home in Chapter 7 bankruptcy.

Chapter 13 Bankruptcy Can Save Your Home

Many people who would lose their homes in Chapter 7 or don't qualify for Chapter 7 find relief in Chapter 13. Chapter 13 works by letting you force a lender into a three- to five-year payment plan. The lengthy repayment period gives you time to catch up on overdue mortgage payments or pay to keep a home you would lose in Chapter 7.

Also, you can direct most of your money toward what you value most, like your mortgage arrearages and debts you can't erase or "discharge" in bankruptcy. Other creditors must share whatever remains, and they usually receive far less than you owe.

As an additional benefit, you might even be able to shave off a junior mortgage or home equity line of credit ("HELOC") if you owe more for your home than what it's worth.

Learn more about your home in Chapter 13 bankruptcy.

Qualifying to Keep Your Home in Bankruptcy

It's possible to keep your home in bankruptcy, but the following two problems can cause you to lose it unless appropriately addressed in the correct bankruptcy chapter.

• Are you behind on your mortgage and can't bring it current? Your lender will want the house back.
• Do you have more equity than you can keep or "exempt"? The trustee will want the nonexempt portion for other creditors.

Keep reading to learn which chapters will help you overcome these qualification issues. If you'd like a primer on exempting equity first, skip to "Determining How Much Home Equity You Can Exempt."

Protecting Your Home From Your Lender in Bankruptcy

Your lender can recover your home if you don't pay as agreed under the contract because bankruptcy doesn't eliminate mortgage liens. The lien gives the lender the right to foreclose when you fall behind on the payments. Here's what to expect when filing for bankruptcy with mortgage arrearages.

Chapter 7 Bankruptcy

In Chapter 7, you must be current on your mortgage to keep your house. Otherwise, your lender can take steps to foreclose, including filing a motion asking the court to lift the automatic stay so the lender can proceed during the bankruptcy case. (You'll find more information in "How Long the Automatic Stay Will Protect Your Home in Bankruptcy" below.)

Example. Aaron fell behind on his mortgage and owed $15,000 in arrearages when he filed for Chapter 7 bankruptcy. Aaron expected the lender to ask the bankruptcy court for permission to foreclose during the bankruptcy case. However, the lender waited until after the Chapter 7 case ended to resume foreclosure and recover the house.

Chapter 13 Bankruptcy

In Chapter 13, you can overcome the mortgage arrearages hurdle by demonstrating you have enough income to pay your monthly mortgage payment and all arrearages by the end of the Chapter 13 plan.

You might also be able to eliminate or "strip" a lien from a junior mortgage or home equity line of credit (HELOC). Your home must be worth less than the balance on the senior loan to strip junior liens. This option isn't available in Chapter 7.

Example. When Charlotte filed for Chapter 13, she owned a home worth $300,000. She owed $325,000 on the first mortgage, $25,000 on the second mortgage, and had a $10,000 HELOC. Charlotte was behind $15,000 on the first mortgage, $500 on the second, and $200 on the HELOC. In her Chapter 13 plan, she paid $250 monthly for 60 months to clear the arrearages on the first mortgage ($250 x 60 = $15,000).

But that's not the end of Charlotte's analysis. Because she owed more on the first mortgage than her home was worth, she was able to strip the liens from the second and the HELOC. After the lien strip, she wasn't required to repay the arrearages on the second mortgage or the HELOC. Instead, she was able to group them with the lowest priority debts, pay significantly less than their value, and discharge the balances at the end of her case. As a result, only the first mortgage remained on the home after bankruptcy.

Protecting Your Home From the Bankruptcy Trustee

You must be able to protect all of your home equity with a bankruptcy exemption. Your creditors are entitled to the home equity you can't protect. Here's how the trustee claims nonexempt equity for creditors in Chapters 7 and 13.

Chapter 7 Bankruptcy

One of the primary duties of the Chapter 7 trustee is selling nonexempt property for the benefit of creditors. If you can't exempt all the home's equity, and the nonexempt equity is sizeable enough to make selling the home worthwhile, you'll lose the house. The trustee will sell it, give you the homestead exemption amount, deduct the trustee's fee and sales costs, and disperse the remaining proceeds to creditors.

Example. Stefan owes $125,000 on a home worth $160,000, and the state's homestead exemption is $25,000. The trustee will probably not sell Stefan's house because the net sales proceeds wouldn't cover real estate sales costs and the trustee's fee. In this case, the trustee would need to pay the $125,000 mortgage and give Stefan $25,000, leaving only $10,000, assuming the home sold for $160,000.

Example. Kristin owes $200,000 on a home worth $375,000. Her state's homestead exemption covers $100,000 of the home's $175,000 equity. If Kristin files for Chapter 7, the trustee will sell Kristin's house, give Kristin $100,000 for the homestead exemption, and use the remaining $75,000 (minus fees and sales costs) to pay Kristin's other creditors.

Chapter 13 Bankruptcy

The Chapter 13 trustee doesn't sell property. Instead, you pay creditors an amount equal to the nonexempt equity through the Chapter 13 repayment plan to keep the house. If you can't pay creditors an amount equal to the home's nonexempt equity, you won't be able to use Chapter 13 to save the home.

In that situation, the Chapter 13 trustee will object to your plan's approval or "confirmation." To move forward with bankruptcy, you'd need to "surrender" the house or let it go back to the bank.

Example. Faye owns a home free and clear worth $500,000. Her state homestead exemption is $400,000, leaving $100,000 in nonexempt equity. If Faye filed for Chapter 13, she would pay creditors a minimum of $1,667 monthly for 60 months ($1667 x 60 = $100,000). She'd likely pay more, depending on her earnings, debt type, and property.

As a side note, in a real bankruptcy case, the nonexempt portion would be less because the trustee would deduct sales costs and the trustee's fee. The deduction is allowed because it ensures filers pay the same amount in Chapters 7 and 13.

Determining How Much Home Equity You Can Exempt

You'll start by reviewing your state's bankruptcy exemptions. Bankruptcy exemption laws list the property you can save or "exempt." Your state might allow you to use the federal bankruptcy exemptions instead. If so, select the system that protects the most valuable property. You can't use exemptions from more than one system.

Once you know which exemption set to use, determine how much equity you can protect using the homestead or wildcard exemption. Sometimes, you can use both.

Compare the exemption amount to the equity you have in your home. Your home's equity is the amount remaining after subtracting the mortgages, HELOCs, and property liens from your home's current market value. If the exemption amount fully covers your home equity, you'll successfully meet the exemption requirement in Chapters 7 and 13.

Example. Will owns a home free and clear worth $250,000. His state offers a $350,000 homestead exemption. The trustee wouldn't sell his home in Chapter 7, and Will wouldn't be required to pay anything to keep his home in Chapter 13.

Example. Emily has $145,000 in home equity. Her state offers a $75,000 homestead exemption and a $10,000 wildcard she can use on any property of her choosing. Emily has $85,000 of exempt home equity and $60,000 of nonexempt home equity. Emily would lose her home in Chapter 7. She could keep her home in Chapter 13 if she could afford $1,000 monthly for 60 months ($1,000 x 60 = $60,000) plus other amounts required by the Chapter 13 plan.

How Filing for Bankruptcy Protects Your Home: The Process

When you file for bankruptcy, the automatic stay stops creditors from pursuing collection activities, including foreclosures. However, it might not protect you throughout the entire procedure. Lenders can ask the court to remove or "lift the automatic stay" and allow the lender to foreclose on your home.

Lifting the Stay in Chapter 7 Bankruptcy

In Chapter 7, the court will grant the lender's motion to lift the stay if the home doesn't have enough equity to protect the lender from loss. For instance, the equity must cover the arrearages and the payments, interest, and fees that will accumulate until the property is sold. This amount is known as an "equity cushion."

Example. The lender files a motion to lift the automatic stay, asserting the lender's lien rights to recover the property because the debtor is behind on payments. The bankruptcy filer cannot bring the loan current and doesn't oppose the motion. However, the Chapter 7 trustee who plans to sell the home files an opposition. The trustee argues that the property has a sufficient equity cushion of $100,000, which is more than enough to compensate the lender for any payments and interest the lender doesn't receive while the trustee sells the home. The bankruptcy court agrees that the lender failed to show harm and denied the lender's motion.

It's worth noting that a Chapter 7 filer can bring the loan current at the motion, but it rarely happens. Why? Because bankruptcy lawyers advise filers to pay back mortgage payments before filing if the filer can raise the funds. Planning reduces the risk of losing the house and avoids the costs of defending a needless motion.

Example. Lola wanted to file for Chapter 7 bankruptcy to stop a home foreclosure and erase credit card debt. Lola's bankruptcy lawyer explained what she would need to do to be sure she could keep her home in Chapter 7 bankruptcy. Lola was able to protect all of her equity with a bankruptcy exemption. However, she was three months behind on her mortgage. The bankruptcy lawyer advised her to wait to file for Chapter 7 until she could bring the mortgage current if she wanted to keep the house. However, Lola knew she couldn't raise the money soon and would continue to fall further behind. A month after filing for Chapter 7, the bankruptcy court granted the lender's motion to lift the stay because of the mortgage arrears. The lender foreclosed on Lola's home a few months later.

Lifting the Stay in Chapter 13 Bankruptcy

In Chapter 13, the court will grant the lender's motion to lift the stay if the Chapter 13 plan doesn't comply with the two primary rules discussed in this article. Specifically, the plan must include a monthly lender payment for arrearages and any nonexempt equity you can't protect with a homestead or wildcard exemption.

Example. Curtis filed for Chapter 13 because he was behind $12,000 on his mortgage and wanted to keep his home. He also had $120,000 in equity. His state offered a $100,000 homestead exemption, leaving $20,000 in unprotected equity. His five-year Chapter 13 plan included paying his mortgage lender $534 monthly for 60 months, plus interest and trustee fees ($534 x 60 months = $32,000). Because the Chapter 13 plan provided for the mortgage arrears and unprotected equity, Curtis's lender didn't file a motion to lift the automatic stay. Curtis completed the plan and kept his home.

Consult a Bankruptcy Lawyer

A home is often a filer's most significant asset, so it's essential to have a bankruptcy attorney review your situation and explain how the principles above apply to the facts of your case. You'll also learn about less common options not discussed here, such as a local loan modification program or a claim you can litigate in an adversary proceeding against your lender.

We wholeheartedly encourage research and learning, but online articles can't address all issues or the facts of your case, and the law can change. The best way to protect yourself is by hiring a bankruptcy lawyer.

Updated December 12, 2023