Having equity in your home doesn’t make you ineligible to file for bankruptcy. However, whether you can keep your home in bankruptcy depends on if your home equity is exempt. Read on to learn more about how to protect your home in bankruptcy.
For more information on how bankruptcy affects your home, see Protect Your Home in Bankruptcy.
If your home is worth more than the balance of your mortgages and other liens on the property, then you have equity. Home equity is considered an asset in your bankruptcy. If you file for Chapter 7 bankruptcy, the bankruptcy trustee has the power to sell your nonexempt assets (including your home) to pay back your creditors. In Chapter 13 bankruptcy, you have to pay the value of your nonexempt assets to your unsecured creditors through your repayment plan.
As a result, the amount of equity you have in your home can play an important role in your decision to file for bankruptcy. If you can’t exempt all of your home equity, you risk losing your home in Chapter 7 bankruptcy or having to pay back most of your unsecured debts in a Chapter 13. Luckily, most states allow you to protect a certain amount of equity in your home (discussed below).
Exemptions are what allow you to keep a certain amount of property in Chapter 7 bankruptcy. But how much property you can protect depends on the exemption laws of your state. Most states have a homestead exemption specifically designed to protect a certain amount of equity in your principal residence. If you can fully exempt the equity in your home, a Chapter 7 trustee can’t sell it to pay your creditors.
However, homestead exemption amounts can differ greatly from state to state. Check your state’s exemption laws or talk to a bankruptcy attorney in your area to make sure you can exempt all of your equity and protect your home before filing your case.
To learn more, see The Homestead Exemption.