Should I file for bankruptcy if I have equity in my home?

If you have equity in your home, your state's homestead exemption and your financial circumstances will dictate whether bankruptcy is a good idea.

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 whether you can protect your home equity with a bankruptcy exemption.

For more information on how bankruptcy affects your home, see Protect Your Home in Bankruptcy.

Your Home Equity in Bankruptcy

If your home is worth more than the amount you owe on your mortgages and other property liens, 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 must 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 essential 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 or paying back more unsecured debts in Chapter 13. Luckily, most states allow you to protect a certain amount of equity in your home (discussed below).

Learn about releasing liens in bankruptcy.

The Homestead Exemption in Bankruptcy

Exemptions are what allow you to keep a certain amount of assets in Chapter 7 bankruptcy. But how much property you can protect will depend 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 entirely exempt the equity in your home, a Chapter 7 trustee can’t sell it to pay your creditors.

However, homestead exemption amounts differ from state to state. Check your state’s exemption laws or talk to a bankruptcy attorney in your area. You'll want to be sure you can exempt all of your equity before filing your case.

To learn more, see The Homestead Exemption.

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