Can you file for bankruptcy and keep your home?

according to Data from the Administrative Office of the U.S. 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 may be weighing 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 home ultimately comes down to those laws, the type of bankruptcy you file, and the equity value of your home.

“While bankruptcy can seem like a financial disaster, the right legal counsel, tax advisor, and wealth advisor can work together to craft a solution that puts you in a better position than you originally were,” said David Gottlieb, wealth manager at Savvy. Real estate consultants, via email.

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

Learn more: How does the mortgage process work?

In this article:

Chapter 7 bankruptcy, sometimes referred to as “liquidation bankruptcy,” helps those who are burdened by debt and can no longer continue making their required payments. When you file 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 a relief with the bankruptcy court. In general, protected assets are those you need to live, such as your home, car, and retirement savings. To preserve your home in a Chapter 7 bankruptcy, you will need to file a homestead exemption.

Homestead and Chapter 7 exemptions

The 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 market value of the home. For example, if your mortgage balance is $250,000 and the current market value of your home is $200,000, you don’t have any equity in the house. Therefore, you will likely be able to keep your home. State bankruptcy laws can vary greatly, so be sure to check with a qualified bankruptcy attorney.

The federal homestead exemption is $27,900 for individual taxpayers and $55,800 for joint taxpayers with a home in a married couple’s name. However, some states have homestead exemptions that are higher or lower than the federal exemption.

Countries with unlimited homestead exemption:

• Arkansas

• Florida

• yeah

• Kansas

• Oklahoma

• South Dakota

• Texas

States with low household 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 own limit, while others give you the option of using the state or federal limit. A bankruptcy attorney in your state can help you navigate this 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 homestead exemption for $27,900, the trustee will sell the house and use the remaining $47,100 to pay creditors.

Mortgage Payment Status and Chapter 7

To maintain your home when filing for Chapter 7, you must stay on top of your monthly mortgage payments. Once the court has discharged your bankruptcy — making it official in the court system — you must continue making mortgage payments as agreed upon to avoid foreclosure.

Read more: How to Use Mortgage Forbearance to Avoid Foreclosure

Chapter 13 bankruptcy — also known as a wage plan — allows you to file a plan with the court to pay off your debts, provided you have regular income. Depending on state law and total debt, you will have three to five years to pay off your unsecured debt. During that period, your creditors cannot file collection efforts.

Chapter 13 offers homeowners more options for keeping 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 handles the remaining equity. In Chapter 13, if you have $40,000 in home equity and a $20,000 home equity exemption, the $20,000 difference will be added to your debt repayment plan to pay off your unsecured creditors.

Next, Chapter 13 is more generous for those who live in states with high homestead exemptions. Chapters 7 and 13 are similar in that you can generally keep your home if the amount of equity in your home is less than the maximum amount allowed for the 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 an additional advantage over Chapter 7: Chapter 13 does not require that you be in compliance with your mortgage payments. If you are in default or on the verge of foreclosure, Chapter 13 stops those proceedings. Alternatively, you can use a three- to five-year repayment plan to keep your payments current.

Once your payment plan is complete, you should keep your mortgage payments up to date. If you become delinquent on your payments again, you risk losing your home to foreclosure.

That was a lot of information, so here’s a quick summary of the answer to the question, “Can my house be seized if I file bankruptcy?” Based on Chapter 7 and Chapter 13 bankruptcies. As a note, these guidelines are general, and you should consult an attorney who specializes in the bankruptcy laws in your state.

• How to solve your debts: By liquidating your assets

• Requirements for maintaining your home: Your mortgage payments must be current, and you must file a homestead exemption to protect your home equity.

• If your home equity is less than the homestead exemption: You will likely be able to keep your home, although this depends largely on your state’s laws.

• If your home equity exceeds the homestead exemption: The bankruptcy trustee will sell your home to pay off your unsecured debts. You will receive the difference between your home equity and home equity exemption upon your bankruptcy discharge.

• Probably best for: Homeowners with equity that is less than the maximum homestead exemption limit in their state and large unsecured debts.

• How to solve your debts: By creating a three- to five-year debt repayment plan

• Requirements for maintaining your home: Mortgage payments do not have to be current, but they must be current over the term of your repayment plan.

• If your home equity is less than the homestead exemption: You will likely be able to keep your home, although this depends largely on your state’s laws.

• If your home equity exceeds the homestead exemption: The difference between your home equity and home equity relief 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 adhere to a required repayment plan.

That’s the burning question, isn’t it? If you cannot keep your home during bankruptcy (or if you have 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 be approved for a mortgage loan after filing for bankruptcy,” Tom Booth, director of retail mortgage at U.S. Bank based in Cincinnati, said in an email interview. “There are many factors and dependencies to consider, including the type of bankruptcy, the mortgage product, and whether the bankruptcy filing affected your credit score.”

Bankruptcies can remain on your credit report for seven to ten years, depending on the type filed. During this time, your overall credit score will drop significantly while you rebuild your creditworthiness. Low credit scores usually translate into higher interest rates on every type of credit, including mortgages.

The type of mortgage product can also determine when you can return to home ownership. Below is a list of common types of mortgages and how long you will have to wait from the date of your bankruptcy discharge to apply for a loan.

Learn more: The credit score needed to buy a home

If you declare bankruptcy, you may keep your home. While laws vary from state to state, you can generally keep your home if the value of your home equity is less than the exemption allowed in your state. With Chapter 7, you must be in compliance with your mortgage payments to be eligible to keep your home. With Chapter 13, you don’t have to be current, but you do have to make current payments within the payment period set by the bankruptcy court.

It’s generally easier to keep your home when you file for Chapter 13 bankruptcy than under Chapter 7, but there are ways to avoid foreclosure with Chapter 7. You should be on top of your mortgage payments before filing, although the rules regarding homestead exemptions vary by state.

Depending on the type of mortgage, you may be eligible for another mortgage within one to four years after your bankruptcy discharge. Qualifying for a mortgage after bankruptcy depends on the type of bankruptcy, your credit score, and other financial factors determined by your chosen lender.

This article was edited by Laura Grace Tarpley.