According to data from the Administrative Office of the US Courts, there were more than 450,000 bankruptcy filings in 2023. If you’re considering bankruptcy this year to gain some much-needed debt relief and have a mortgage, one question might weigh heavy 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 may be safe. Your ability to keep your house ultimately comes down to those laws, the type of bankruptcy you file, and your home equity.
“While bankruptcy can appear as a financial catastrophe, the right legal counsel, tax advisor, and wealth advisor can team up to mold a solution that puts you in a better position than you were originally,” said David Gottlieb, a wealth manager at Savvy Advisors who specializes in real estate, via email.
Ready for the scoop? Let’s dive into the types of bankruptcy and how it’s possible to protect your home and financial future.
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Chapter 7 bankruptcy, sometimes referred to as “liquidation bankruptcy,” helps those overwhelmed by debt who can no longer keep up their required payments. When you file Chapter 7, a court-appointed trustee is tasked with selling your assets to pay off any unsecured debt — think credit cards and personal loans that aren’t backed by collateral.
However, Chapter 7 allows you to protect certain assets by filing an exemption with the bankruptcy court. Generally, protected assets are those you need to live, like your home, car, and retirement savings. To keep your house in a Chapter 7 bankruptcy, you’ll need to file a homestead exemption.
Homestead exemptions and Chapter 7
A homestead exemption is a law that protects your home equity 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 instance, if your mortgage balance is $250,000 and the current market value for your home is $200,000, you wouldn’t have any home equity. Therefore, you’ll likely be able to keep your home. State bankruptcy laws can vary widely, so be sure to check in with a qualified bankruptcy lawyer.
The federal homestead exemption is $27,900 for individual 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 homestead exemption:
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Arkansas
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Florida
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Iowa
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Kansas
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Oklahoma
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South Dakota
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Texas
States with low homestead exemptions:
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New Jersey: $0
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Kentucky: $5,000
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Missouri: $15,000
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Pennsylvania: $0
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Tennessee: $5,000 ($7,000 for joint owners)
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Virginia: $5,000 ($10,000 for married couples)
The exemption amount you can use in bankruptcy is up to your state’s laws. Some states may force you to use their limit, while others give you a choice of using 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 homestead exemption of $27,900, the trustee will sell the home and use the remaining $47,100 to pay the creditors.
Mortgage payment status and Chapter 7
To keep your home when filing Chapter 7, you must be current on your monthly mortgage payments. Once the court discharges your bankruptcy — making it official in the court system — you must continue making mortgage payments as agreed to avoid foreclosure.
Read more: How to use mortgage forbearance to avoid foreclosure
Chapter 13 bankruptcy — also known as a wage earner’s plan — lets you submit a plan to the court to repay your debt, provided you have a regular income. Based on state law and total debt, you’ll have three to five years to repay your unsecured debt. During that time, your creditors can’t file collection efforts.
Chapter 13 offers homeowners more options to keep their home too.
First, the homestead exemption rules in Chapter 7 also apply to Chapter 13. The difference between the two plans is how the bankruptcy court treats the leftover equity. In Chapter 13, if you have $40,000 in home equity and a $20,000 homestead exemption, the $20,000 difference is added to your debt repayment plan to pay off your unsecured creditors.
Next, Chapter 13 is much more generous for those living in states with high homestead exemptions. Chapters 7 and 13 are similar in that you can generally keep your house if the amount of equity in your home is less than your maximum allowable homestead exemption. But if you live in a state with a high or unlimited homestead exemption, you can generally protect all of your home equity.
Mortgage payment status and Chapter 13
Chapter 13 has one additional advantage over Chapter 7: Chapter 13 doesn’t require that you be current on your mortgage payments. If you’re behind on payments or on the brink of foreclosure, Chapter 13 halts those proceedings. Instead, you can use the three- to five-year repayment plan to keep your payments current.
Once your payment plan is complete, you must keep your mortgage payments current. If you become delinquent again, you risk losing your home to foreclosure.
That was quite a bit of information, so here’s a recap with the quick answer to “Can my house be taken if I file bankruptcy?” based on Chapter 7 and Chapter 13 bankruptcy cases. As a note, these guidelines are general, and you should consult with an attorney specializing in your state’s bankruptcy laws.
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How it resolves your debt: By liquidating your assets
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Requirements to keep your home: Mortgage payments must be current, and you must file a homestead exemption to protect your home equity.
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If your home equity is less than the allowed homestead exemption: You can likely keep your home, though this heavily depends on your state’s laws.
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If your home equity exceeds the allowed homestead exemption: The bankruptcy trustee will sell your home to pay your unsecured debts. You’ll receive the difference between your home equity and homestead exemption at bankruptcy discharge.
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Likely best for: Homeowners with less home equity than the maximum allowable homestead exemption in their state and significant unsecured debt.
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How it resolves your debt: By creating a debt repayment plan lasting three to five years
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Requirements to keep your home: Mortgage payments don’t have to be current, but you must become current during your repayment plan term.
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If your home equity is less than the allowed homestead exemption: You can likely keep your home, though this heavily depends on your state’s laws.
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If your home equity exceeds the allowed homestead exemption: The difference between your home’s equity and the homestead exemption is applied to your debt repayment plan to pay your unsecured debts.
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Likely best for: Homeowners with a regular income who are behind on mortgage payments and can commit to the required repayment plan.
This is the burning question, isn’t it? If you cannot keep your home during bankruptcy (or if you’ve filed for bankruptcy in the past and now want to buy your first house), you still have a path to future homeownership.
“It’s possible to be approved for a mortgage loan after filing for bankruptcy,” said Tom Booth, a mortgage retail manager with U.S. Bank based in Cincinnati, in an email interview. “There are several factors and dependencies to consider, including the type of bankruptcy, the mortgage product, and if the bankruptcy filing has impacted your credit score.”
Bankruptcies can stay on your credit report for seven to 10 years, depending on the type filed. During this time, your credit score will generally take a significant dip as you rebuild your creditworthiness. Lower credit scores usually translate to higher interest rates on every type of credit, including mortgages.
The type of mortgage product can also determine how soon you can step back into homeownership. Here’s a list of common types of mortgages and the time you’ll have to wait from your bankruptcy discharge date to apply for a loan.
Learn more: The credit score needed to buy a house
If you file bankruptcy, it is possible to keep your home. While laws vary by state, you can generally keep your home if your home equity is less than the allowable homestead exemption in your state. With Chapter 7, you must be current on mortgage payments to be eligible to keep your home. With Chapter 13, you don’t have to be current, but you need to bring payments current during the repayment period set by the bankruptcy court.
It’s generally easier to keep your home when filing for Chapter 13 than Chapter 7 bankruptcy, but there are ways to avoid foreclosure with Chapter 7. You must be up to date on mortgage payments before filing, though, and the rules regarding homestead exemptions vary by state.
Depending on the type of mortgage, you could be eligible to get another mortgage between one and four years following the discharge of your bankruptcy. Qualifying for a mortgage post-bankruptcy depends on the type of bankruptcy, your credit score, and other financial factors set by your chosen lender.
This article was edited by Laura Grace Tarpley.
