How to File for Bankruptcy Without Losing Your Home


Filing Chapter 7 or Chapter 13 bankruptcy can wipe out your mortgage debt, but not the mortgage lien on your property. If you don't pay the mortgage, you could lose your house. In Chapter 7 bankruptcy, you can lose the house even if you keep the mortgage current.

Chapter 7

In a Chapter 7 bankruptcy, a court trustee sells your assets and uses the money to pay off creditors. If the trustee sells your house, the mortgage lender gets its money back, and any equity — the value of the house greater than the mortgage debt — goes to your creditors.

Federal and state law exempts some of your assets from Chapter 7 liquidation, including part of your equity. At time of writing, federal law exempts $22,975 in equity, double that if you're filing joint bankruptcy with your spouse. For example, if you have a house worth $140,000 that carries a $120,000 mortgage, your $20,000 of equity is exempt. The trustee can't give the value to your creditors, so there's no point in selling the house. You can keep your home as long as you keep up your mortgage payments.

Each state sets its own exemptions for home equity and other assets. Depending on state law, you may get double the exemption if you're filing bankruptcy with your spouse, or you may be able to use the federal exemption if that gives you a better deal. You can look up your state's exemption rules for homes. The U.S. Courts website recommends talking to a bankruptcy attorney, as the rules can be complex, and change over time.

The bankruptcy court won't exempt your home automatically. To exempt your property, download and file Schedule C with your bankruptcy petition. When you fill out the schedule, note whether you're employing the state or federal exemptions. List your house as one of your exempt assets and cite the federal or state statute that justifies this. Then list both the current value of your property and the amount of your exemption. You submit this to the trustee, along with your petition and other paperwork.

Chapter 13

If your exemptions aren't enough to shield your equity in Chapter 7, filing Chapter 13 may be a better alternative. Unlike Chapter 7, the court doesn't sell off your house or other assets. Instead, you spend 3 to 5 years paying all your disposable income to a court trustee, who distributes the money to your creditors.

When you submit your bankruptcy petition to the court, you include a payment plan, detailing how much of your disposable income each creditor receives each month. You can use the plan to catch up on back payments over the life of the plan, as long as you keep making current payments. The mortgage is a higher priority than most other debts, so if you have to short-change your credit-card company or payday lender to keep the house, that's allowed.

However, the bankruptcy court can reject the payment plan. After you budget for paying your mortgage and other top-priority debts, such as child support, you must have enough disposable income left to pay a reasonable amount to your other creditors. At a minimum, you must pay them as much as they'd receive if you filed Chapter 7. If you don't have the money, you may have to choose between your mortgage and your bankruptcy discharge.

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