How Can I File Chapter 7 and Keep My House?

You may have heard that filing bankruptcy means you’ll lose everything, but bankruptcy laws provide some protection for property and personal items. Bankruptcy is meant to help give you a fresh start, not to make you start over with nothing. That said, it’s absolutely normal to worry about how your living situation will be affected, especially if you own your home. In this article, we’ll help you understand how your house might be impacted by a Chapter 7 bankruptcy filing.

Will You Be Able To Keep Your House? 

The answer depends on two things:

• How much you owe on your mortgage, and 

• How much your home is worth. 

In other words: your equity. That’s the value of your property minus the amount you owe on your mortgage loan.

If you’re current on your mortgage and the value of your home isn’t much higher than your outstanding mortgage balance, you can likely keep your house in a Chapter 7 bankruptcy. If you have significant equity in the home or if you’re behind on your mortgage payments, you’ll have a few options to consider. Read on to learn more.

If You Own Your Home Outright…

If you’ve paid off your mortgage and you don’t have a home equity loan or any liens against your property, you own your home outright. This means you have 100% equity in your home. If this is the case, you’ll need to figure out whether your state’s homestead exemption is high enough to cover your equity. If so, you can keep the house.

Figure Out Your Homestead Exemption

In this case, your first line of defense is the bankruptcy exemption for real property used as a home. This is often called a homestead exemption. It can be applied to protect a portion of the value of your home. 

Each state has its own set of exemptions. Depending on your state of residence, the exemption amount could range from a few thousand dollars to over $500,000. Some even cover the entire market value of the real estate. Some states set acreage limits rather than equity limits, so keep an eye out for those. 

In addition to state exemptions, there are federal exemptions. Some states allow filers to choose between state and federal exemptions. The federal homestead exemption will also be available to you if your state doesn’t allow you to claim residency because you’ve lived there for less than two years. If you have multiple homes, take note that the homestead exemption can only be applied to one property, usually your primary residence. 

Determine if There’s Unprotected Equity

To determine if the full equity in your home is protected by the homestead exemption, you’ll need to determine your property’s fair market value, then subtract your state’s exemption(s). For example, let’s say you live in Mississippi and you own a home worth $100,000. The Mississippi homestead exemption is $75,000, whether you’re a single filer or you’re married and filing jointly. 

So the formula looks like this:

• Home Value/Equity ($100,000) – State Exemption ($75,000) = Unprotected Equity ($25,000)

In this scenario, you have $25,000 of unprotected equity in your home. But that’s not the end of the line as the nonexempt equity has to be enough to pay the costs of the sale and the trustee’s commission. If it’s not enough to do both, there’s no reason for the trustee to sell the property, as it won’t result in a payout to your creditors. 

If there is enough nonexempt equity, the trustee will likely sell the home, give you the dollar amount of the homestead exemption, and pay off creditors with the remaining funds.

Keep in mind, your homestead exemption can typically only be used to protect a single property. And, depending on how the real estate market is trending in your area, the value of the home may increase after filing, which can result in renewed interest by the trustee. 

Without any mortgage or liens on your property, it’s very possible that your home will be worth enough for the trustee to sell. So, if you own your home free and clear, filing a Chapter 7 bankruptcy may not be the best path for lasting debt relief. 

If You’re Paying a Mortgage or Have Liens…

There are two main levers that will decide if you can hold onto your home if you’re filing Chapter 7 with a mortgage or liens against your home. The first is if you’re current with your mortgage. The second is your home equity, which again is what you get when you subtract your home’s value from your mortgage/liens.

Determine Your Status With the Mortgage Company 

To file Chapter 7 bankruptcy and keep your home, you must be current on your mortgage or be able to bring it current shortly after filing. Otherwise, you may lose the home to foreclosure. Chapter 7 can temporarily pause foreclosure proceedings, but it won’t allow you much time to pay off past-due payments to stop foreclosure altogether. 

If you’ve fallen behind on your monthly payments but you wish to file Chapter 7 bankruptcy and keep your property, you may be able to negotiate with your mortgage company before you file your case. If your lender agrees to modify or refinance your loan to deal with the past-due amount, you can bring the mortgage debt current. It’s essential to complete this before filing, as bankruptcy proceedings could disrupt the loan modification or refinancing process. 

If your lender doesn’t agree to resolve the back mortgage payments, you may wish to file Chapter 13 bankruptcy instead. In Chapter 13, your debts are reorganized into a three-to-five-year repayment plan. Your past-due mortgage payments can be included in this plan. To qualify for a Chapter 13 bankruptcy, you’ll need to show that you have enough monthly income to afford the plan payments. You also can’t have more than a certain amount of  unsecured debt. So if you have large student loans and/or medical bills, you may not be eligible to file Chapter 13. 

If you have too much unsecured debt, but you want to file Chapter 13, you may be able to file Chapter 7 first. There’s no unsecured debt limit in Chapter 7. So if you qualify for Chapter 7, you can use it to wipe out your eligible unsecured debts, then you can file Chapter 13 to deal with the remaining debt in a repayment plan. This is sometimes called Chapter 20 (Chapter 7 + Chapter 13 = Chapter 20)

Determine How Much Equity You Have in Your Home

Once you’re current on your mortgage or can get current, you need to determine how much equity you have in your home. This will help determine whether you can keep your home. To see if your home is at risk or not, you’ll have to do a little math: 

• Step 1: Determine your equity by subtracting an outstanding loan amount from your home’s current value. (If the result is negative, you have negative equity, so you can skip the remaining steps.)

• Step 2: Subtract your homestead exemption from your equity.

• Step 3: If the resulting number is positive, subtract the trustee’s fee (average of 12%) and the average cost to sell (6%). 

Here’s an example: Let’s say you live in Alabama and are current with your mortgage. Alabama doesn’t allow federal exemptions, so you have to use the state exemptions. Your home is worth the typical amount for Alabama: $187,367. The Alabama homestead exemption is $15,500. Your outstanding mortgage is $130,000. Let’s crunch some numbers!

• Step 1: Your equity is $187,367 (home value) minus $130,000 (outstanding mortgage). That pencils out to $57,367.

• Step 2: Subtract the homestead exemption ($15,500) from your equity ($57,367). This equals $41,867. Since this is positive, we need to move on to Step 3.

• Step 3: First we calculate the trustee’s fee ($41,867 x .12 = $5024) and the average cost to sell ($41,867 x .06 = $2,512). Combined that equals $7,536. Now we substract this from the equity: $41,867 – $7,536.06 = $34,331(rounded).

In this example, there’s a positive dollar amount at the end, which means your home would be at risk of sale by the trustee. If you’re left with a negative dollar amount at the end, you’ll likely be able to keep your home.

Let’s Summarize…

Keeping your home in a Chapter 7 bankruptcy will depend on how much you owe on it and what exemptions apply. If you have a lot of equity in your home, the trustee may choose to liquidate it and use the money to pay off your creditors.

Understanding the impact bankruptcy filing can have on your life can be overwhelming, especially when you’re already feeling the stress of debt. While this article provides a useful overview of figuring out if your home may be at risk in a Chapter 7 bankruptcy, each individual’s situation is unique, and so are each state’s exemptions! 

Luckily, most bankruptcy attorneys offer free consultations. Take advantage of this free legal advice to get a better sense of what the right choice is for you. Also, remember that there are local legal aid organizations that provide free or low-cost legal assistance to low-income individuals.