Jilann Jurvelin Carlson
June 2023

Can You Keep Your House If You File Bankruptcy?

No one wants to file for bankruptcy, but it can be the best option in some financial situations. When you declare bankruptcy, you may wonder if you can keep your home; the answer is that it depends.

Three primary things will play a role in whether or not you can keep your home after you file for bankruptcy.

The first is the type you file, also known as the Chapter of bankruptcy being filed. The second is the equity you have in your home, and the third is whether or not you can afford your mortgage payments based on your debt.

Chapter 7 vs. Chapter 13 Bankruptcy

The two types of available bankruptcy are Chapter 7 and Chapter 13. There are pretty major differences between these, but one of the biggest relates to the exemptions you’re allowed.

The legal assumption is that everyone should try to pay off their debt, and if you have what could be considered excessive property, you should have to sell it to pay your debt.

At the same time, the primary objective of bankruptcy is to give you a new start rather than leave you in poverty. With that in mind, federal and state governments will have exemptions. If your property value is under a certain dollar amount, you may be able to keep it.

Chapter 7 exemptions are stricter and lower overall compared to Chapter 13. If you file for Chapter 13, your opportunities for keeping your home are greater.

Your Equity

Even when filing for Chapter 7 bankruptcy, you might still be able to keep your house, but the decision-making factor becomes your equity.

Equity is how much the market value of your house minus whatever you owe on your mortgage or home equity loan. If you don’t have that much equity in your home, which is often the case for people filing bankruptcy, then your house could be exempt, and you might not have to sell it as part of your bankruptcy.

If you’ve built some substantial equity in your house that puts you over the limit of exemption, you might be required to sell it and then pay your debt or buy it back by paying a trustee the home’s value.

Mortgage Affordability

If you hang onto your home while going through bankruptcy, you can keep it when the process is done, but you still have to be able to pay the mortgage.

If you can eliminate the rest of your debt, maybe it becomes fairly easy for you to afford your mortgage payments, and you can keep your house.

The bank might foreclose if your income doesn’t allow you to realistically keep up with payments.

When you file for bankruptcy, you can walk away from your mortgage without additional penalties or consequences. It can be advantageous to do so in many cases. Then, as you wind down the bankruptcy process, you aren’t burdened by a big monthly payment for your mortgage, and you actually are giving yourself the opportunity for a fresh start. You have to be careful to avoid trying to hang on to things that will put you right back in a similar financial situation to what led to your bankruptcy.

Exempting Your Equity

With both types of bankruptcy, you have to figure out if you can protect your home’s equity. The exemptions will vary depending on your state, and only a few states let you keep all of your home’s equity if you file for bankruptcy. The majority of states have a low homestead exemption.

If you’re thinking about bankruptcy and wondering what would happen to your home, the best thing to do is talk to an attorney because the rules vary so much by state, the type of bankruptcy, and your financial situation.

Jilann Jurvelin Carlson,REALTOR
Windermere/Coeur d'Alene Realty
1000 Northwest Blvd. #200
Coeur d'Alene, ID 83814

Equal Housing Opportunity