Back data from the Administrative Office of the US Courtsthere were more than 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 might weigh 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 may be safe. Ultimately, your ability to keep your house depends on those laws, the type of bankruptcy you file, and your home equity.
“Although bankruptcy can seem like a financial disaster, the right legal counsel, tax advisor, and wealth advisor can come together to craft a solution that puts you in a better position than you were originally,” says David Gottlieb, wealth manager at Savvy Advisors who specializes in real estate, by email.
Ready for the scoop? Let's dive into the types of bankruptcy and how it is possible to protect your home and your financial future.
Learn more: How the foreclosure process works
In this article:
Chapter 7 bankruptcy, sometimes referred to as “discharge bankruptcy,” helps those overwhelmed by debt who can no longer keep up with 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. Protected assets are generally those you need to live, such as your home, car, and retirement savings. In order to keep your home in a Chapter 7 bankruptcy, you will need to file a homestead exemption.
Homestead 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 is more than 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 greatly, so be sure to check with a qualified bankruptcy lawyer.
The federal homestead exemption is $27,900 for single taxpayers and $55,800 for joint taxpayers who have a home in the names of both spouses. 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 housing 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 the laws of your state. 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 the maximum exemption in your state, 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 the creditors.
Mortgage payment status and Chapter 7
In order to keep your home while 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 to make 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 plan – lets you present a plan to the court to repay your debt, provided you have a regular income. Based on state law and total debt, you will have three to five years to repay your unsecured debt. During that time, your creditors cannot file collection efforts.
Chapter 13 offers more options for homeowners to keep their home as well.
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 remaining 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 your unsecured creditors.
Next, Chapter 13 is much more generous to those who live 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 does not require you to be current on your mortgage payments. If you are behind on payments or about to foreclose, Chapter 13 prevents those cases. 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 up to date. If you become delinquent again, you risk losing your home to foreclosure.
That was a lot of information, so here is a summary 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 who specializes 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 homestead exemption allowed: You can probably keep your home, although this depends a lot on your state's laws.
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If your home equity is more than the home exemption allowed: The bankruptcy trustee will sell your home to pay off your unsecured debts. You will receive the difference between your home equity and your home exemption upon a bankruptcy discharge.
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Probably best for: Homeowners with less home equity than the maximum homestead exemption allowed in their state and significant unsecured debt.
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How it resolves your debt: By creating a debt repayment plan that lasts three to five years
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Requirements to keep your home: Mortgage payments do not have to be current, but you must become current during the term of your repayment plan.
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If your home equity is less than the homestead exemption allowed: You can probably keep your home, although this depends a lot on your state's laws.
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If your home equity is more than the home exemption allowed: The difference between your home equity and the homestead exemption applies to your debt repayment plan to cover your unsecured debts.
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Probably best for: Homeowners with 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 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,” said Tom Booth, retail mortgage manager with US Bank 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 affected 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 drop as you rebuild your credit worthiness. Lower credit scores usually translate into higher interest rates on all types of credit, including mortgages.
The type of mortgage product can also determine how soon you can step back into home ownership. Here is a list of common types of mortgages and the time you will 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. Although laws vary by state, you can generally keep your home if your home equity is less than the homestead exemption allowed 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 do need to bring current payments during the repayment period set by the bankruptcy court.
It is generally easier to keep your home when filing for Chapter 13 than a Chapter 7 bankruptcy, but there are ways to avoid foreclosing on your home with Chapter 7. You must be current on mortgage payments before filing, however , and the rules regarding homestead exemptions vary by state.
Depending on the type of mortgage, you may be eligible for another mortgage between one and 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 was edited by Laura Grace Tarpley.