Can You Declare Chapter 7 Bankruptcy If You Own Your Home?

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Chapter 7 bankruptcy, also referred to as Chapter 7 liquidation, requires that you list all assets and debts, including your home, in a series of documents called schedules. Schedule A holds information about your home and any other real property for which you hold a legal interest. Federal or state property exemptions allow many to keep their homes even with the bankruptcy filing.

How It Works

A Chapter 7 bankruptcy trustee only has the legal right to seize and sell non-exempt assets to pay your creditors. Whether you can keep your home depends on whether the equity you’ve accumulated, if any, is less than or exceeds the property exemption for your state.

In most states, the more you owe -- and the less equity you have -- the greater your chances for keeping the home. Therefore, except for homeowners living in states such as Florida, Iowa and Kansas that protect 100 percent of accumulated equity, those with a paid-off mortgage stand the greatest chance of losing their home.

Mortgage Concerns

Past due payments and questions about whether reaffirmation is necessary are common concerns.

  • Chapter 7 bankruptcy usually can delay foreclosure proceedings but can’t stop foreclosure proceedings once they begin. If your mortgage currently is past due but not yet in foreclosure, you’ll either need to cure the default or negotiate with your lender to come up with an alternate solution before the case ends.
  • According to the Michigan Foreclosure Prevention Project, although a reaffirmation agreement between you and your lender is a technical requirement, this isn’t always necessary. In most cases, the lender will continue to accept payments rather than begin foreclosure proceedings as long as your mortgage remains current.

Federal vs. State Exemptions

Some states follow federal exemption guidelines, while others have their own exemption laws. Additionally, a few states with their own laws allow you to choose to apply either the federal or the state exemption.

  • The federal exemption as of this publication is $22,975 for an individual, or $45,950 if you’re married and file a joint income tax return.
  • State-mandated exemption limits vary widely. For example, some states permit “exemption doubling” for married people filing a joint bankruptcy. Additionally, in some states, such as Arkansas and Iowa, the homestead exemption protects all of the equity in your home. In other states, however, the exemption protects only a small amount of equity.

The property exemption applies only to your primary residence regardless of whether you apply the federal exemption or a state-mandated exemption. However, some state laws require that you establish eligibility by filing a homestead declaration prior to filing a Chapter 7 bankruptcy petition.

How a Property Exemption Can Save Your Home

In a Chapter 7, if the equity you’ve accumulated in your home is less than the maximum exemption, you most likely won’t lose your home. This is because the trustee must divide proceeds from the sale and return the amount of the exemption to you. Without equity that exceeds the maximum exemption, there won’t be any money left to distribute to your creditors.

For example, if your state uses the federal exemption -- $22,975 -- but you only have $10,000 in accumulated equity, the trustee would have to return that $10,000 to you after the sale, leaving nothing for anyone else. On the other hand, if you have $50,000 in accumulated equity, the trustee is more likely to seize and sell your home, because there would be leftover money to distribute to your creditors even after reimbursing you.

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