How to Protect Your Home in Bankruptcy

by: Kathleen Michon

Many people considering Chapter 7 or Chapter 13 bankruptcy are worried about losing their homes. Some may be facing foreclosure, others may be managing their mortgage just fine but don't want to lose their home as a result of bankruptcy.

Whether you can keep your home in bankruptcy depends on a number of factors: 

• whether you file for Chapter 7 or Chapter 13
• if you file for Chapter 7, how much equity you have in your home, and
• if you file for Chapter 7, the amount of the available homestead exemption. 

Your Home in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you keep your property and repay your debts (some in full, others in part) over time. Because you keep your property, you won't lose your home if you are current on your mortgage payments.

If you are behind on mortgage payments or facing foreclosure, Chapter 13 allows you to make up the arrearage through your repayment plan. For this reason, Chapter 13 is often a good choice for people at risk of losing their homes.

Chapter 13 can also help if you have second or third mortgages or home equity lines of credit (HELOCs) that are not secured by the equity in your property. If this is your situation, you may be able "strip off" (remove) those mortgages and loans from your home. (To learn more about this, see Removing a Second Mortgage in Bankruptcy.)

To use Chapter 13, however, you must earn enough money to fund a repayment plan that meets legal requirements. To learn more about the Chapter 13 plan, including what you must pay through your plan, see the articles in The Chapter 13 Repayment Plan area.

Your Home in Chapter 7 Bankruptcy

If you file for Chapter 7 bankruptcy, the bankruptcy trustee will sell your nonexempt assets and distribute the proceeds to creditors. (To learn more about how Chapter 7 bankruptcy works, see the articles in Chapter 7 Bankruptcy.) 

Luckily, bankruptcy law protects some of your property from the reach of the creditor through "exemptions." If your equity in property is exempt, the trustee cannot take it. To determine how much equity you have in your home, subtract all mortgages and liens from the current market value of your home.

The federal bankruptcy exemptions, and most state exemptions, provide debtors with a homestead exemption, which protects at least some of the equity in your primary residence. The federal exemptions protect up to $21,625 in your home (double that amount for married couples filing jointly). State homestead exemption amounts vary greatly. (To learn more about how exemptions work, the homestead exemption in particular, and which exemptions you can use, see the articles in Bankruptcy Exemptions.)

Chapter 7 bankruptcy does not provide a way for filers to make up mortgage arrears. This means that unless you can work something out with the lender, you will eventually lose your home, despite your bankruptcy filing.

The Automatic Stay and Foreclosure

Bankruptcy's automatic stay prevents creditors from continuing collection actions once a bankruptcy petition has been filed. The protection from the automatic stay extends to foreclosure proceedings. However, lenders can ask the court to remove the automatic stay (called lifting the stay). If it is a foregone conclusion that you will lose your home, the court is very likely to lift the stay and allow the foreclosure to proceed. It won't require the lender to wait until the bankruptcy case is over to foreclose on your home.