Can you file for bankruptcy and keep your home?

according to data from the Administrative Office of the US Courtsthere were over 450,000 bankruptcy filings in 2023. If you’re considering bankruptcy this year to get some much-needed debt relief and get a mortgage, one question may be weighing heavily on your mind: Can my house be taken if I file for bankruptcy?

Here’s the good news: Thanks to laws designed to protect homeowners, your home can be safe. Your ability to keep your home ultimately comes down to these laws, the type of bankruptcy you file, and the equity in your home.

“Although bankruptcy can appear like a financial catastrophe, the right legal counsel, tax advisor and wealth advisor can come together to shape a solution that puts you in a better position than you were originally.” said David Gottlieb, wealth manager at Savvy. Advisors specialized in real estate, via email.

Ready for the scoop? Let’s dive deeper into the types of bankruptcy and how you can protect your home and financial future.

More information: How the foreclosure process works

In this article:

Chapter 7 bankruptcy, sometimes called “liquidation bankruptcy,” helps those overwhelmed by debt who can no longer keep up with required payments. When you file for Chapter 7, a court-appointed trustee is tasked with selling your assets to pay off any unsecured debts; think credit cards and personal loans that are not backed by collateral.

However, Chapter 7 allows you to protect certain assets by filing an exemption in bankruptcy court. In general, protected assets are those you need to live on, such as your home, car and retirement savings. To keep your home in a Chapter 7 bankruptcy, you will need to file a homestead exemption.

Estate and Chapter 7 Exemptions

A homestead exemption is a law that protects the equity in your home during bankruptcy. A good rule of thumb is that you can keep your home if your mortgage balance exceeds the home’s market value. For example, if your mortgage balance is $250,000 and the current market value of your home is $200,000, you would have no home equity. Therefore, you will probably be able to keep your home. State bankruptcy laws can vary widely, so be sure to consult with a qualified bankruptcy attorney.

The federal homestead exemption is $27,900 for single taxpayers and $55,800 for joint taxpayers with a home in both spouses’ names. However, some states have homestead exemptions that are higher or lower than the federal exemption.

States with an unlimited property exemption:

Arkansas
Florida
Iowa
Kansas
oklahoma
South Dakota
Texas

States with low family homestead exemptions:

New Jersey: $0
Kentucky: $5,000
Missouri: $15,000
Pennsylvania: $0
Tennessee: $5,000 ($7,000 for joint owners)
Virginia: $5,000 ($10,000 for married couples)

The amount of exemption you can use in bankruptcy depends on your state’s laws. Some states may force you to use their limit, while others give you the option to use the state or federal limit. A bankruptcy attorney in your state can help you navigate the process.

If your home equity exceeds your state’s maximum exemption, the bankruptcy trustee will sell your home to pay your creditors. So, if you have $75,000 in equity but can only claim a $27,900 homestead exemption, the trustee will sell the home and use the remaining $47,100 to pay creditors.

Mortgage Payment Status and Chapter 7

To keep your home when you file for Chapter 7, you need to be on top of your monthly mortgage payments. Once the court discharges your bankruptcy, making it official in the court system, you must continue to make your mortgage payments as agreed to avoid foreclosure.

Chapter 13 bankruptcy, also known as a wage earner’s plan, allows you to present a plan to the court to pay off your debt, as long as you have a regular income. Depending on state law and the total debt, you will have three to five years to pay off your unsecured debt. During this time, your creditors cannot file collection efforts.

Chapter 13 gives homeowners more options to keep their home as well.

First, the rules for exempting Chapter 7 property also apply to Chapter 13. The difference between the two plans is how the bankruptcy court treats leftover equity. In Chapter 13, if you have $40,000 in home equity and an exemption of $20,000, the $20,000 difference is added to your debt repayment plan to pay your unsecured creditors.

Next, Chapter 13 is much more generous for those who live in states with high exemptions. Chapter 7 and 13 are similar in that you can generally keep your home if the amount of equity in your home is less than your maximum allowable exemption. But if you live in a state with a high or unlimited homestead exemption, you can generally protect all the equity in your home.

Mortgage Payment Status and Chapter 13

Chapter 13 has an additional advantage over Chapter 7: Chapter 13 does not require you to keep up with your mortgage payments. If you are behind on payments or on the verge of foreclosure, Chapter 13 stops these proceedings. Instead, you can use the three- to five-year repayment plan to keep your payments current.

Once your payment plan ends, you must keep your mortgage payments up to date. If you become a delinquent again, you are at risk of losing your home to foreclosure.

That was quite a bit of information, so here’s a summary with the quick answer to “Can I take my house if I file for bankruptcy?” based on Chapter 7 and Chapter 13 bankruptcy cases. As a note, these guidelines are general and you should consult with an attorney who specializes in your state’s bankruptcy laws.

How to resolve your debt: With the liquidation of its assets
Requirements to maintain your home: Your mortgage payments must be current and you must file a home equity waiver to protect your equity in your home.
If your home equity is less than the allowed exemption: You will likely be able to keep your home, although this largely depends on your state’s laws.
If your home equity exceeds the allowable exemption: The bankruptcy trustee will sell your home to pay off your unsecured debts. You will receive the difference between your home equity and the estate exemption upon the bankruptcy discharge.
Probably best for: Homeowners with less home value than the maximum homestead exemption allowed in their state and significant unsecured debt.

How to resolve your debt: By creating a debt repayment plan lasting three to five years
Requirements to maintain your home: Your mortgage payments don’t have to be current, but you do need to be current during the term of your repayment plan.
If your home equity is less than the allowed exemption: You will likely be able to keep your home, although this largely depends on your state’s laws.
If your home equity exceeds the allowable exemption: The difference between your home equity and the property exemption is applied to your debt repayment plan to pay off your unsecured debts.
Probably best for: Homeowners with regular income who are behind on their mortgage payments and can commit to the required repayment plan.

That’s the burning question, isn’t it? If you can’t keep your home during bankruptcy (or if you’ve filed for bankruptcy in the past and now want to buy your first home), you still have a path to future home ownership.

“It is possible to get approved for a mortgage loan after filing for bankruptcy,” Tom Booth, a retail mortgage sales manager with Cincinnati-based US Bank, said in an email interview. “There are several factors and dependencies to consider, such as the type of bankruptcy, the mortgage product, and whether the bankruptcy filing has affected your credit score.”

Bankruptcies can stay on your credit report for seven to 10 years, depending on the type of filing. During this time, your credit score will generally drop significantly as you rebuild your credit. Lower credit scores usually translate into higher interest rates for every type of credit, including mortgages.

The type of mortgage product can also determine how soon you can become a homeowner again. Here’s a list of common types of mortgages and how long you’ll have to wait from your bankruptcy discharge date to apply for a loan.

More information: The credit score needed to buy a home

If you file for bankruptcy, it is possible to keep your home. Although laws vary by state, you can generally keep your home if your equity is less than the homestead exemption allowed in your state. With Chapter 7, you must keep up with your mortgage payments in order to keep your home. With Chapter 13, you don’t need to be current, but you do need to be current on your payments during the repayment period set by the bankruptcy court.

It is generally easier to keep your home when you file for Chapter 13 bankruptcy than for Chapter 7, but there are ways to avoid foreclosure with Chapter 7. However, you must keep up with your mortgage payments. mortgage before filing, and rules about property exemptions vary by state.

Depending on the type of mortgage, you may be eligible to get another mortgage anywhere from one to four years after your bankruptcy is discharged. Qualifying for a mortgage after bankruptcy depends on the type of bankruptcy, your credit score, and other financial factors set by your chosen lender.

This article has been edited by Laura Grace Tarpley.

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