How to File Bankruptcy and Keep Your House
You can file bankruptcy and keep your house, but it depends on several factors. A court will look at how long you’ve lived in your home, the equity you have in your home, and the type of bankruptcy you filed. Each state has its own laws and exemptions that may affect keeping your home after bankruptcy.
Chapter 7 and Chapter 13 bankruptcy are the two types of bankruptcy that enable you to keep your house if you meet specific criteria. Here is more information about the steps to take to file bankruptcy and maintain ownership of your home afterward.
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Can you file for bankruptcy and keep your house?
Yes, it’s possible to file for bankruptcy and keep your house, but it depends on several individual circumstances and factors:
- Bankruptcy type
- Amount of home equity
- State exemptions
- Mortgage payment status
Bankruptcy type
It’s possible to keep your home if you file Chapter 7 or Chapter 13 bankruptcy.
According to the IRS, you’ll work with a trustee, who will sell your assets to pay your debts during a Chapter 7 bankruptcy. However, depending on exemptions in the state you live in and your home’s equity, it’s possible to exclude your home from the trustee’s sale of your assets.
A Chapter 13 bankruptcy involves reorganizing your debt and committing to a plan to repay it over a period of up to five years. The IRS states that you must have a steady income to qualify for this type of bankruptcy.
The U.S. Courts explain that the primary advantage of a Chapter 13 plan is that you can keep your house and even stop a current foreclosure as long as you make your plan payments.
Amount of home equity
The amount of equity you have in your home is an important factor in bankruptcy proceedings. During a Chapter 13 bankruptcy, you can keep your home if you meet your payment plan obligations. However, the amount of equity you have in your home will play a role in the terms of that plan and the amount you’ll have to repay your creditors.
In a Chapter 7 bankruptcy, exemptions might protect your home equity from a sale. However, if you have a large amount of equity in your home, your trustee may choose to sell your home to settle your debts. It’s important to talk to a bankruptcy attorney to see which type gives you the best chance of maintaining home ownership.
This seems counterintuitive, but the amount of home equity a homeowner has significantly affects their ability to keep their house during bankruptcy proceedings.
If your home has a high equity amount, it could lead to the house being sold to pay creditors if it exceeds the state’s homestead exemption, meaning the homeowner may lose their house if they have more equity than they are allowed to protect under bankruptcy law. Conversely, if the home’s equity amount is low enough, they can likely keep their home.
Eric Kirste, CFP®
State exemptions
Exemptions are assets you can keep during bankruptcy, and several federal and state bankruptcy exemptions exist. Depending on where you live, you may be able to choose between state or federal exemptions.
According to an article in the Journal of Law and Economics, the amount of exemptions you can get varies depending on your state. An example of an exemption would be some or all of your home’s equity.
Mortgage payment status
According to Cara O’Neill, an attorney writing for All Law, continuing to make mortgage payments during the bankruptcy process is critical if you want to keep your home.
Filing for bankruptcy puts an “automatic stay” on your outstanding debt, which means creditors must stop trying to collect it. However, your mortgage lender can request that the courts lift the stay on your mortgage if you stop making payments during a Chapter 7 bankruptcy. This would enable your lender to foreclose on your home.
A Chapter 13 bankruptcy, on the other hand, can help you catch up on late mortgage payments and avoid foreclosure as long as you follow your court-approved Chapter 13 repayment plan.
How to file bankruptcy and keep your house
Here are the steps to take to file bankruptcy and keep your house.
- Calculate your home equity
- Research exemptions
- Consult a bankruptcy attorney
- Choose your bankruptcy type
- Make your mortgage payments
- File your bankruptcy petition
- Follow your bankruptcy plan
Everyone’s situation is different, so I would highly recommend that you speak first with a bankruptcy attorney who can review your options for safeguarding your home and HELOC.
Here are considerations to look into:
1) Either refinance into a larger or take out a home equity loan. Using such a loan as a lifeline to help you pay off and consolidate debts.
2) If you have at least 20% equity in your home, you can use a cash-out refinance to pay off your bankruptcy debts and consolidate them into a single mortgage payment.
3) You can modify your current loan to make your payments more manageable. This could mean extending the term of your loan, reducing the interest rate, or converting from a variable-rate to a fixed-rate mortgage.
Eric Kirste, CFP®
Calculate your home equity
If you own a home, calculating how much equity you have is an important part of determining whether you can keep your house during bankruptcy proceedings. You can calculate your home equity by subtracting your mortgage balance from your home’s current market value.
In general, the more equity you have, the better your chances of keeping your home. Equity plays a significant role in exemptions, especially in Chapter 7 bankruptcy, where protecting your home often depends on how much equity is covered by state or federal exemptions. Understanding your equity position will help you and your attorney decide on the best course of action to safeguard your home during bankruptcy.
Research exemptions
Once you know how much equity you have in your home, look up bankruptcy exemptions in your state. Every state has bankruptcy laws that protect consumers, but the type of exceptions and the amount allowed differ.
Whether you can protect your home equity will depend on how much you have, how long you’ve lived in your home, and the type of bankruptcy you decide to file.
Consult a bankruptcy attorney
If you need help finding an attorney, the National Association of Consumer Bankruptcy Attorneys (NACBA) maintains a directory of bankruptcy attorneys by ZIP code. It’s important to read reviews of attorneys and understand their fees prior to hiring one. Many attorneys offer free consultations to see whether you’re a candidate for filing bankruptcy.
Choose your bankruptcy type
Your bankruptcy attorney will be able to assess your personal situation, including your home’s value, the amount of equity you have, and whether you are behind on your payments, to help you determine which type is the best for you.
Chapter 7 and Chapter 13 bankruptcy are the two types that can help you keep your home.
Make your mortgage payments
If possible, continue to make your mortgage payments during the process of filing for bankruptcy. Making these payments shows the court you’re committed to keeping your house and that you’re willing to do your part to follow your repayment plan.
File your bankruptcy petition
The United States Courts strongly recommend hiring an attorney to file your bankruptcy petition. You can file the paperwork on your own, but errors on your form can delay your bankruptcy proceedings.
Follow your bankruptcy plan
If the court grants you a Chapter 7 or Chapter 13 bankruptcy, you’ll have specific instructions to follow. It’s important to follow the plan, such as making required payments or working with the court’s appointed trustee, to keep your house.
Alternatives to filing bankruptcy to keep your house
If you’re worried about losing your home but aren’t ready to file bankruptcy, consider exploring debt relief options, refinancing, or loan modification.
Everyone’s situation is different, so I would highly recommend that you speak first with a bankruptcy attorney who can review your options for safeguarding your home and HELOC.
Here are considerations to look into:
1) Either refinance into a larger loan or take out a home equity loan. Using such a loan as a lifeline to help you pay off and consolidate debts.
2) If you have at least 20% equity in your home, you can use a cash-out refinance to pay off your bankruptcy debts and consolidate them into a single mortgage payment.
3) You can modify your current loan to make your payments more manageable. This could mean extending the term of your loan, reducing the interest rate, or converting from a variable-rate to a fixed-rate mortgage.
Eric Kirste, CFP®
Debt relief companies can help you negotiate with creditors to settle debts for less than you owe, giving you the financial breathing room needed to keep your home.
These companies won’t address secured debts, including your mortgage, directly, but they can help resolve unsecured debts—such as credit cards or medical bills—freeing up money to stay current on your mortgage payments. Be sure to consult with a reputable debt relief company, such as National Debt Relief, our highest-rated option.
What to do before you file bankruptcy if you want to keep your house
If you want to keep your house when you file bankruptcy, here are two steps you can take.
Get organized
To prepare to file for bankruptcy, start by gathering all the documents you need. For example, you’ll need your mortgage paperwork, income details, bank account statements, outstanding debt information, and more. Putting your financial data in one place will help make the process smoother.
Consult a professional
It’s helpful to consult a bankruptcy lawyer to discuss the next steps. An attorney can look at the documents you gathered and determine whether you’re a good candidate for keeping your home during bankruptcy proceedings.
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