Can You File for Bankruptcy and Keep Your House?

Filing for bankruptcy comes with many questions and fears, but one of the biggest for homeowners is “Will I lose my house if I file for bankruptcy?”

In many cases, the answer is, no. There are many paths to keeping your house if you file for bankruptcy. What type of bankruptcy you file for (Chapter 7 or Chapter 13) and individual circumstances play a part.

“The basic idea is to preserve at least a minimal level of living,” Ariane Holtschlag, of Chicago’s Factor Law Group, said. “It’s an overwhelming sense of relief when the final decision is made and people realize they aren’t going to lose their home.”

That said, keeping your home if you file for bankruptcy isn’t a given. Bankruptcy, and what comes after it, carries many important considerations for people who want to keep their home.

Different Ways to File for Bankruptcy

Bankruptcy is a process in which the court decides how a person with overwhelming debt can pay it off as much as possible, given their assets, while retaining anything necessary for living (shelter, transportation, etc.). The two major types of individual bankruptcy are Chapter 7 and Chapter 13. Chapter 7 is for people who don’t have the income to pay their debts. Chapter 13, sometimes called wage-earners bankruptcy, helps the debtor structure payments to help pay off debt.

No matter which type of bankruptcy you file for, the court puts an automatic stay on any foreclosure action immediately upon the bankruptcy being filed. It doesn’t mean, however, that you automatically keep your house. Once the bankruptcy is sorted out by the court the stay is lifted. If you keep your home, you must catch up on, and make, your mortgage payments if you don’t want to lose it in the future.

Chapter 7 Bankruptcy

With Chapter 7 bankruptcy, often called liquidation bankruptcy, a court-appointed trustee sells your assets to pay off unsecured debt (like credit cards). Secured debt, like car loans and mortgages, aren’t liquidated. The automatic stay halts foreclosure until the court determines if the home is exempt (defined as personal property the debtor keeps.) If you can’t afford mortgage payments after the bankruptcy is discharged, the foreclosure will proceed.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, often called reorganization bankruptcy, structures debt payments according to income and assets. The court determines a 3-5-year debt payment plan that usually includes both current and catch-up mortgage payments. You keep your home with Chapter 13, but if you don’t make the payments, the bankruptcy is dismissed and you’re back to square one. If you’re behind on your mortgage, you may lose your home through foreclosure.

Factors That Determine Whether You Can Keep Your House

The status of your mortgage – both how current you are with payments and how much equity you have in the home – plays a part in whether you can keep your home in bankruptcy. What type of bankruptcy you file for, as well as federal law and your state’s laws, also play a part.

Equity in Your Home

Home equity is its market value minus what’s owed on the mortgage. For instance, if the market value is $250,000 and you owe $200,000, you have $50,000 equity.

Equity amount is key to whether you keep your home in bankruptcy.

In Chapter 7, a certain amount of equity is exempt. If the exemption is more than equity, or the difference is small, you’ll likely keep your home. If the exemption is less than equity, your home may be sold to pay creditors.

Chapter 13 is designed to keep your house. The home’s equity is an asset that will be included in the plan to pay creditors.

State Exemptions vs. Federal Exemptions

The federal government allows exemptions that permit debtors to protect certain assets. A major one is the homestead exemption, which protects some or all of the equity in a home. Cars, retirement funds, clothing, and other items necessary to live and begin to rebuild financial stability are also protected.

Most states have their own exemption laws. They vary wildly. Seven states (Arkansas, Florida Iowa, Kansas, Oklahoma, South Dakota, and Texas), for instance, allow an unlimited amount to be exempted for home equity; Kentucky allows $5,000. Depending on the state, you can choose between the state exemptions or the federal or are required to use the state’s law.

In Chapter 7 bankruptcy, the debtor keeps their exempt assets. In Chapter 13, the value of exempt assets is subtracted from the total value of assets. The balance goes to the repayment plan.

How to Know if Your Home is Exempt

In general, if you owe more than market value, your home is exempt. Check the exemption rules in your state, though, because they factor in. It can be complicated, depending on where you live. Fees for both the court and bank are also deducted from your portion, among other subtractions. You may want to hire a bankruptcy lawyer to help you sort it out.

Current Mortgage Status

Your mortgage status has an impact on keeping your home after bankruptcy.

Chapter 7 bankruptcy doesn’t discharge mortgage debt, and if you can’t keep up after bankruptcy, you’re facing foreclosure. Options include surrendering your home or trying to work out a reorganization or reaffirmation with your lender.

Under Chapter 13, if you’re behind on your mortgage, your plan will include catch-up payments as well as the regular monthly payments.

If you’re facing foreclosure and plan to file for bankruptcy, file before foreclosure begins. If the bank sells your house after a foreclosure but doesn’t make back what you owe them on it, there is a deficiency judgment, which means you owe the bank the difference. If the foreclosure happens as a result of the bankruptcy, there is no deficiency judgment.

Homestead Exemption

The homestead exemption is key to keeping your home under both Chapter 7 and 13 bankruptcy.

The federal homestead exemption changes every three years and is currently $27,900; it’s $55,800 for a joint bankruptcy when the home is in both spouses’ names. Every state, except New Jersey and Pennsylvania, has its own exemption law.

Some states have an amount limit (the lowest is $5,000 in Kentucky), while seven (Arkansas, Florida Iowa, Kansas, Oklahoma, South Dakota, and Texas) exempt the full value of a primary residence. Some let you choose between the state or federal exemption, some require you to use the state’s. You are required to have lived in a state, in that home, for 40 months, in general, to claim a state homestead exemption. If you haven’t, you claim the federal one.

Under Chapter 7, the equity left after the exemption is used to pay creditors. So, if you have $50,000 in equity and use the federal exemption of $27,900, once the home is sold, the exemption amount goes to you and the balance after the mortgage is paid—$22,100 if the home sells for market value—goes to creditors. If you file for joint bankruptcy and the house is in both partners’ names, you keep your home, since the equity is less than the $55,800 joint exemption.

Under Chapter 13, the exemption is subtracted from equity and the balance goes to the payment plan. For instance, if you have $50,000 in equity and take the federal exemption of $27,900, that means $22,100 is added to your 3-5-year plan to pay creditors.

If you live in a state that has an unlimited exemption, you will likely keep your home under Chapter 7 and will keep all of your equity if you file for Chapter 13.

Things to Consider to Protect Your Home

There are things you can do to protect your home from bankruptcy. Mortgage lenders don’t want to foreclose on a home – it costs them money. They’d much rather find a way to help you stay in your home if you can make payments. If you’re facing foreclosure, the automatic stay gives you the opportunity to look at what the options are for saving your home.

If you file for Chapter 13 bankruptcy, your mortgage and catch-up payments will likely be part of your payment plan. You can also work separately with the lender on a plan to pay your mortgage, catch up, and keep your home. In either case, you must continue to make payments, because if the bankruptcy is dismissed, the payment plan is nullified. Those who still must find a way to pay their mortgage, as well as those filing for Chapter 7, can work with lenders in a number of ways.

Reaffirmation Agreement

A reaffirmation agreement is a way to keep your home after Chapter 7 bankruptcy by legally agreeing to repay your mortgage. It’s used by debtors who are behind on payments and in danger of losing their home. A reaffirmation is voluntary, the lender must agree, it must be done before the bankruptcy is discharged, and the court must approve. It includes the amount owed, a repayment schedule, interest rate, and any fees. The benefit is you keep your home. The downside is that you must be able to catch up on what you owe, as well as make payments. Some legal experts also warn that the lender can take advantage of vulnerable borrowers with interest rates and fees that may make it difficult to keep up with payments.

Loan Modifications

Your lender may agree to a loan modification, which may include adding missed payments to the end of the loan, lowering interest rates, or changing the loan from adjustable to fixed rate in order to lower monthly payments. Once your Chapter 7 bankruptcy is discharged, your bank may be open to modification, even if it wasn’t before you filed. Because bankruptcy resolves many of the borrower’s debt issues, they may be in a more favorable position to negotiate with the bank.

Stripping Second Mortgages

If you have filed Chapter 13, your home is worth less than what you owe, and you have a home equity line of credit or loan on the home, you may be able to “strip” the second mortgage from your home debt. A change in home values after you buy a home is the major reason value decreases.

To strip the second mortgage, the court determines whether selling your home would generate enough money to have some left for the second mortgage after paying the primary mortgage. If there isn’t enough, the second mortgage becomes an unsecured loan, meaning the home is no longer collateral for the second mortgage. This makes it easier to keep your home since the bank can’t foreclose for nonpayment on that second loan. Once your payment plan is completed in Chapter 13, any balances left on unsecured loans are discharged.

What Happens to Your Mortgage When You File for Bankruptcy?

A mortgage is a secured debt – that means that if you pay, you keep the security on it, which is your house. If you don’t pay, you lose it. Bankruptcy, of course, complicates that.

Under Chapter 7, if it’s determined you can’t pay your mortgage, then the bank will foreclose. The house will no longer be yours, and you’ll have to move out. You don’t make any more payments in most cases.

With Chapter 13, you continue to make monthly mortgage payments as well as past due payments, keeping the mortgage alive. But it’s not easy — 48% of the 201,564 Chapter 13 cases that ended in 2023 were dismissed, which means they weren’t completed. Most of those were dismissed because the debtor didn’t keep up with payments. When a case is dismissed, it’s as though the person never filed. The debts are still owed once a Chapter 13 case is dismissed, which puts you right back where you were before filing. You are still responsible for paying your mortgage or you will lose your house.

If You Have Multiple Mortgage Loans

Under Chapter 13, a borrower who has multiple mortgage loans on the same house can get all but the primary categorized as unsecured debt (this is known as stripping). They go into the category that’s covered by your ability to pay, and likely won’t have to be paid back in full. This only comes into play if you owe more on the house than it’s worth.

Deficiency Judgments

If the lender that holds the mortgage on your home forecloses because you weren’t able to pay, they sell the house. If they don’t get enough money for it to cover what you owe, the balance is called a deficiency judgment.

Normally, you’d be responsible to the bank for that money. But if you surrendered the house under Chapter 7 bankruptcy, you don’t have to pay the deficiency judgment. If you have past deficiency judgments, you wouldn’t have to pay those either.

Under Chapter 13, since you keep your house, you’d be responsible for that payment.

Downsides to Keeping Your House When Filing for Bankruptcy

You may desperately want to keep your house, even if you’re so deep in debt you’re considering filing for bankruptcy. That’s understandable — your home not only has an emotional attachment but could someday be an asset, even if you’re behind on payments now.

That said, there are financial downsides to hanging on to your house through a bankruptcy proceeding.

If you file for Chapter 13 bankruptcy, you must continue to make monthly mortgage payments, as well as pay what you were behind on. This can be difficult, even if the payment plan that you, the court, and your lenders agree on seems to be doable.

Many Chapter 13 bankruptcies fail. It’s tough to stick to a payment plan over three to five years, even though modifications to the plan are allowed. Those involve going back to court and explaining why you need one. Through it all, you have to keep current on your mortgage payments, as well as all the other payments agreed to in the plan.

If you file for Chapter 7 and keep your house, you must make the monthly payments. The only hope for a modification is with the bank itself.

Consider whether, after bankruptcy, you can continue to pay your mortgage. If not, the best solution may be to sell your home. Think of it as a step toward a stronger financial future, when you can buy a home that you can keep forever.

Before You File: Why Credit Counseling Matters

Bankruptcy, obviously, is complicated. If you’re worried about keeping your house, it’s even more so. If you’re asking, “Should I file for bankruptcy?” your first move should be to talk to a credit counselor.

Credit counseling through a nonprofit agency can help you develop a debt management plan with payments you can afford so you can avoid bankruptcy. If the credit counselor can work with creditors to lower payments and interest rates on your unsecured debt, like credit cards, it could avert a bankruptcy filing.

Even if you decide to file bankruptcy, the law requires that you consult a credit counselor as part of that process. Federal bankruptcy courts maintain lists of nonprofit credit counselors and you should consider contacting one before filing.