What happens to the positive equity I have in my house if I file for chapter 7 bankruptcy?

In general, the purpose of a Chapter 7 bankruptcy is to liquidate (sell) your assets and pay off as many of your debts as possible.  If the equity you have in your house is more than the state law “homestead exemption” that will be applied in your bankruptcy case, Chapter 7 bankruptcy is not a great choice for you, because the trustee may want to sell your home as part of the liquidation of assets.  The homestead exemption is designed to help you keep a certain amount of the equity that you have built up in your principal residence.  If you are married, the homestead exemption may be larger than if you are single.  However, there is a cap on the amount that can be protected by the homestead exemption, and there are also bankruptcy law provisions that can reduce the amount you are allowed to claim.  However, even in a Chapter 7, you may be able to “reaffirm” the loan with the mortgage holder and catch up any payments that are in arrears, which would allow you to keep your home.  You might consider filing a Chapter 13 “reorganization” type bankruptcy instead, because it allows you a certain period of time, called the “repayment period,” to catch up your payments on all assets and keep the assets.  Usually, the repayment plan period is three to five years. 

Talk to a bankruptcy attorney to determine the best actions for your specific case in this complex and specialized field of law.