What Happens to My Home in Bankruptcy?

By Phil M. Fowler
House for sale image by fejas from Fotolia.com

Most likely you will be able to keep your home when you file for bankruptcy. Under a Chapter 13 bankruptcy, you will always keep your home as long as you make all the required payments under your Chapter 13 repayment plan. Under Chapter 7, you will be able to keep your home if your equity does not exceed the state exemption amount.

Chapter 13

When you file for Chapter 13, you essentially request court approval to consolidate your debt into a single, reduced monthly payment. You will make that payment to a bankruptcy trustee, and the trustee will then pay all of your creditors. The bankruptcy trustee does not sell any of your property, and as long as you remain current on your plan payments, none of your creditors can foreclose on your property, so you will keep your home.

Liquidation

Chapter 7 is much more involved than Chapter 13. Chapter 7 bankruptcy is liquidation bankruptcy, which means you liquidate most of your assets by selling them and using the money to pay off your existing debts. Technically, the bankruptcy trustee is the person who sells your property and applies the money to your creditors in order of legal preference.

Exemptions

Even under Chapter 7, the bankruptcy trustee will not sell certain exempt property. Each state has adopted its own exemption laws, so the details vary depending on where you live. In general, though, every state allows a homestead exemption that allows you to keep your home up to a certain value. In Florida, for example, you can keep your home no matter the value, but in Alabama you can only keep your home if you have $5,000 or less in equity.

Calculations

Calculating your exemption amount is easy if you own your home free and clear of a mortgage. For example, if you live in Alabama and your home is worth $60,000 and you own it free and clear, then the bankruptcy trustee will sell your home because $60,000 exceeds the $5,000 exemption. The trustee then will give you $5,000 cash to cover your homestead exemption and use the balance to repay as many of your debts as possible.

Mortgage

Calculating your equity and homestead amount is more complicated if you have a mortgage. Determine your equity by comparing the home value to your outstanding mortgage. If you owe $58,000 and your home is worth $60,000, then you have $2,000 equity. In Alabama, for example, you would be able to keep your home. Your mortgage would continue after the bankruptcy, as long as you remain current on your payments. If you fall behind, your mortgage lender can foreclose on the home even though you filed for bankruptcy.