Can I File Bankruptcy If I Have Equity in My Home?

Feeling like you’re drowning in debt is a terrible place to be. When the phone rings, you might jump, thinking it’s another creditor. If you own your home and have some equity built up, the idea of bankruptcy can be even more terrifying.

You’re probably asking yourself, “Can I file bankruptcy if I have equity in my home and still keep it?” It’s a question that brings a lot of worry, and you’re not alone in wondering about this. Many homeowners face this exact dilemma, especially when considering how to file bankruptcy if I have equity in my home and protect their biggest asset through available bankruptcy exemptions.

The short answer is yes, you often can file for bankruptcy even if you have equity in your house. However, whether you get to keep your home depends on many things. It’s not a straightforward yes or no for everyone because bankruptcy law tries to balance helping you get a fresh start with treating your creditors fairly, ensuring creditors receive what they are due under the law.

This means we need to look at what type of bankruptcy chapter you’re thinking about, how much equity you possess, and some special laws called bankruptcy exemptions. These elements all come together to paint the picture of what could happen in your bankruptcy case. Understanding these pieces is the first step to figuring out your path forward and achieving your financial goals.

What Exactly is Home Equity?

Before we go much further, let’s clarify home equity. Your home equity is the portion of your home’s value that you own outright. It’s what your home is currently worth in the market, minus any money you still owe on your mortgage payment or any other loans secured by your home, like a home equity line of credit (HELOC) or tax liens.

For example, if your home could sell today for $300,000, and you still owe $200,000 on your mortgage, your equity is $100,000. This equity amount becomes important when you’re looking at filing bankruptcy. Creditors and the bankruptcy trustee will be interested in this value because it represents an asset that could potentially be used to pay creditors some of what they are owed.

Calculating equity accurately is fundamental. You’ll need a realistic idea of your home’s current market value and your outstanding mortgage balance. A local real estate agent can provide a comparative market analysis (CMA), but for bankruptcy court, a formal appraisal is often preferred for precision. Remember that if a trustee were to sell the property, sales costs would also be deducted.

Bankruptcy 101: Chapter 7 vs. Chapter 13

When people talk about personal bankruptcy, they’re usually referring to two main types: Chapter 7 and Chapter 13. They work quite differently, especially if you have home equity. Choosing the right bankruptcy chapter is essential if keeping your home is your primary objective when you file bankruptcy.

Here’s a brief overview:

Feature	Chapter 7 Bankruptcy	Chapter 13 Bankruptcy
Primary Goal	Liquidation of nonexempt assets to pay creditors; discharge of eligible debts.	Reorganization of debts into a 3-5 year repayment plan.
Treatment of Home Equity	Nonexempt equity can lead to the trustee selling the home.	Home can be kept, but nonexempt equity must be paid to creditors through the plan.
Mortgage Arrears	Does not provide a mechanism to catch up on missed mortgage payments within the bankruptcy.	Allows inclusion of mortgage arrears in the repayment plan to catch up over time.
Duration	Typically 3-6 months until case closed.	3 to 5 years.
Eligibility	Means test required; income cannot be too high.	Requires regular income; debt limits apply.

Chapter 7 Bankruptcy: The Liquidation Path

Chapter 7 bankruptcy is often called “liquidation” bankruptcy or a “straight” bankruptcy. The core idea is that a court-appointed individual, the bankruptcy trustee, might sell some of your nonexempt property to pay your creditors. In return, many of your unsecured debts, like credit card bills and medical bills, can be wiped out, or discharged. This process usually concludes relatively quickly, often within a few months, after which your case closed.

If you have home equity, Chapter 7 can be risky for keeping your home. If your equity is not protected by a bankruptcy exemption (more on this soon), the trustee could decide to sell your home. They would pay off your mortgage, give you the amount of your protected exempt equity (if any), deduct sales costs, and then use the rest of the money to pay creditors. So, if your equity is significant and not covered by an exemption, Chapter 7 might not be the best choice if you desperately want to stay in your house.

To file Chapter 7, you generally need to pass a “means test.” This test looks at your income and expenses to determine if you genuinely lack the funds to make significant payments towards your debts. Upon filing bankruptcy, an automatic stay goes into effect, which temporarily stops most collection actions, including foreclosure proceedings on your real estate.

Chapter 13 Bankruptcy: The Reorganization Road

Chapter 13 bankruptcy operates quite differently; it is a reorganization. It’s structured as a repayment plan, often called a wage earner’s plan. Instead of selling your assets, you propose a plan to repay some or all of your debts over three to five years. You make regular monthly payments to the bankruptcy trustee, who then distributes the money to your creditors according to the court-approved payment plan.

This option is often much better if you have equity in your home that isn’t protected by a bankruptcy exemption, or nonexempt equity. With Chapter 13, you generally get to keep all your property, including your house. However, your repayment plan must account for that nonexempt equity. This means your plan payments will need to ensure your unsecured creditors receive at least as much as they would have if your nonexempt assets, like the unprotected portion of your home equity, were sold in a Chapter 7. Essentially, you are “buying back” your nonexempt equity over time. This structure is designed to protect equity while satisfying creditor claims to some extent.

Chapter 13 can also be an effective way to catch up on missed mortgage payments. If you’re behind on your monthly mortgage payments but want to keep your home, Chapter 13 allows you to include those past-due amounts in your repayment plan. This provision can halt foreclosure and help you get back on track with your mortgage lender. It can also be a tool to manage tax liens on your property by including payments towards them in the plan.

The Big Deal: Bankruptcy Exemptions and Your Home

The concept of exemptions is perhaps the most important thing to understand when you want to file bankruptcy if I have equity in my home. Exemptions are laws that protect certain types of property up to a certain value from being taken by the bankruptcy trustee to pay your creditors. Every state has its own set of state’s bankruptcy exemptions, and there’s also a federal list of exemptions, including a federal homestead exemption. Some states let you choose between the state and federal exemptions, while others require you to use the state’s exemptions. This is a key area where advice from a local bankruptcy lawyer is invaluable, as federal law and state law can differ significantly. It’s wise to ensure the law updated in your state is considered.

Your Best Friend: The Homestead Exemption

When it comes to your house, the most important exemption is the homestead exemption. This law specifically protects a certain amount of the equity you have in your primary residence. The amount of protection can vary wildly from state to state; these homestead exemptions are not uniform. Some states offer very generous homestead exemptions, protecting hundreds of thousands of dollars in equity. Others offer very little, perhaps only a few thousand dollars, or have specific rules on acreage or location (urban vs. rural). The difference in your state’s bankruptcy exemptions can be the deciding factor in keeping your home.

Let’s consider an example. Imagine your state’s homestead exemption is $75,000. If you have $60,000 in home equity, your entire equity is protected; the property exempt from seizure by the trustee for this purpose. In this case, a Chapter 7 trustee likely wouldn’t be interested in selling your home because there would be no nonexempt equity to distribute to creditors after paying off the mortgage and giving you your exempt amount.

However, if you have $100,000 in equity and the exemption is $75,000, you have $25,000 in nonexempt equity. In a Chapter 7, the trustee might consider selling your home to access this nonexempt property. In a Chapter 13, you’d need to pay at least that $25,000 (plus trustee fees) to your unsecured creditors through your repayment plan to keep the home, thereby protecting equity.

Are There Other Exemptions That Could Help?

While the homestead exemption is the main one for your home, sometimes other bankruptcy exemptions can play a role in asset protection. Some states have a “wildcard” exemption, which allows you to protect a certain amount of value in any type of property. This could potentially be applied to additional home equity if your homestead exemption isn’t enough, or if you have other valuable assets you wish to protect. For a married couple, the way property is titled, such as “tenants by the entirety” (if recognized for bankruptcy protection in your state), might offer additional safety against creditors of only one spouse, but this is a complex legal issue.

Understanding all available federal exemptions and your state’s exemptions is key. A knowledgeable bankruptcy lawyer can help identify all applicable exemptions in your specific bankruptcy case. This careful review ensures you maximize your protections under bankruptcy law.

How Your Equity Level Influences Which Bankruptcy You Choose

Deciding between Chapter 7 and Chapter 13 often comes down to how much equity you have and how much of it is protected by your state’s homestead exemption. This is a central part of figuring out if you can file bankruptcy if I have equity in my home and achieve your financial goals. The amount of equity you can protect equity in determines the viability of each chapter.

What if Your Home Equity is Fully Protected?

If you’ve done your homework, looked at your home’s value, your mortgage balance, and your state’s homestead exemption, and you find that all of your equity is covered, you’re in a relatively good position. In this situation, Chapter 7 bankruptcy might be a strong option. You could potentially wipe out your eligible unsecured debts, keep your home (as long as you stay current on your mortgage payments), and get a fresh financial start relatively quickly. The trustee would likely see no benefit in trying to sell your home because all the proceeds from the equity would go back to you via the exemption, leaving nothing for other creditors to receive.

What if You Have Equity That’s Not Protected?

This is where things get more complicated, and Chapter 13 often becomes the more attractive option if keeping your home is paramount. If you have nonexempt equity – meaning equity above what your homestead exemption covers – then filing for Chapter 7 could mean losing your home. The trustee’s job in Chapter 7 is to find nonexempt assets, or nonexempt property, to sell for the benefit of your creditors. Your unprotected home equity is precisely that type of asset.

If a Chapter 7 trustee sells your home, they would first pay off the mortgage. Then, they would give you the cash value of your homestead exemption. Any money left over after that (and after paying sales costs and trustee fees) would be used to pay your unsecured creditors. This can be a distressing prospect for many bankruptcy filers.

This is where Chapter 13 can be a home-saving tool. In Chapter 13, you can keep your home, even with nonexempt equity. But, as mentioned earlier, your repayment plan must pay your unsecured creditors an amount at least equal to the value of your nonexempt assets, including that unprotected home equity. So, if you have $30,000 in nonexempt equity, your plan would need to ensure your unsecured creditors receive that much over the three-to-five-year plan period. It allows you to protect your asset by essentially paying for the non-exempt portion over time through your monthly payment.

Thinking Through Some Real-Life Scenarios

Let’s try to make this a bit more concrete with a few examples. Remember, these are simplified, and every situation is different. State laws and local bankruptcy practices also make a huge difference.

Imagine Sarah: She lives in a state with a $50,000 homestead exemption. Her home is worth $250,000, and she owes $210,000 on her mortgage. Her equity is $40,000 ($250,000 – $210,000). Since her $40,000 equity is less than the $50,000 exemption, her home equity is fully protected; it’s exempt equity. If Sarah needs to file bankruptcy and meets other qualifications for Chapter 7, she might be able to discharge her credit card debts and keep her home, provided she continues to make her mortgage payments. She decided to file Chapter 7 after a free consultation.

Now consider David: He lives in the same state with a $50,000 homestead exemption. His home is worth $300,000, but he only owes $180,000 on his mortgage. His equity is $120,000 ($300,000 – $180,000). Since his exemption is $50,000, he has $70,000 in nonexempt equity ($120,000 – $50,000). If David files Chapter 7, the trustee would likely want to sell his home. After the sale and paying off the mortgage and sales costs, the trustee would give David his $50,000 exemption, and the remaining amount (less costs) would go to his creditors. If David wants to keep his home, Chapter 13 would be a much better option, allowing him to propose a repayment plan to cover that $70,000 over time.

Finally, there’s Maria, who owns a small business and her home: Her home has significant equity, say $200,000, and her state’s homestead exemption is only $25,000. She has $175,000 in nonexempt equity. Chapter 7 would almost certainly mean losing her home. Chapter 13 would require her to pay a large amount through her plan to cover that nonexempt equity. In such a case, while Chapter 13 is an option to keep the home, Maria might also explore bankruptcy alternatives very carefully, like trying to sell the property herself to control the process, especially if her small business income is unstable.

Other Things That Affect Keeping Your Home

Besides equity and exemptions, a couple of other things are important for keeping your house when you file for bankruptcy.

One big factor is whether you are current on your mortgage payments. If you file Chapter 7, you generally must be up-to-date on your monthly mortgage and continue making those payments on time if you want to keep the house. A bankruptcy discharge under Chapter 7 typically erases your personal liability for the mortgage debt, but the lender still has a lien on the property. If you stop paying, they can foreclose once the automatic stay is lifted or if they get permission from the bankruptcy court.

Chapter 13 offers more flexibility here. If you are behind on your mortgage, Chapter 13 allows you to include those arrears (the past-due payments) in your repayment plan. You can catch up on them gradually over the three to five years of the plan, while also making your regular ongoing mortgage payments. This is a powerful tool to stop foreclosure and keep your home, addressing this common legal issue.

Also, the overall health of your budget matters. Even if your equity is protected, you need to be able to afford the mortgage payments, property taxes, and insurance moving forward. The bankruptcy court will want to see that your plan to keep the house is realistic and sustainable. Dealing with other debts, like a student loan, within the bankruptcy framework can sometimes free up cash flow to make homeownership more viable post-bankruptcy.

Crucial Steps Before You Decide to File Bankruptcy If I Have Equity in My Home

Thinking about how to file bankruptcy if I have equity in my home is a massive decision, not one to be taken lightly. Before you even think about filling out bankruptcy forms, there are some important steps you should take to understand the entire bankruptcy process.

First, get a real, honest valuation of your home. Don’t just guess or use online estimators that might be inaccurate. A local real estate agent can give you a comparative market analysis (CMA), or for more accuracy, consider a professional appraisal. Knowing the true market value is essential for accurately calculating equity.

Second, you must find out your state’s specific homestead exemption amount and any rules that go with it. Is it based on marital status? Does it change if you have dependents? This information is critical, as it directly impacts how much of your equity protected. Resources from groups like the American Bankruptcy Institute can offer general information from online articles, but state-specific details, which can be affected by recently updated law, are paramount.

Third, be totally honest and complete when listing all your assets, debts, income, and expenses if you proceed with filing bankruptcy. Hiding assets or trying to be clever can lead to serious bankruptcy issues, including having your case dismissed or even facing fraud charges. The trustee will review everything. Accurate completion of bankruptcy forms is non-negotiable.

Finally, and this is probably the most important piece of advice: talk to an experienced local bankruptcy lawyer. This area of law is complicated, and navigating federal laws and your state’s bankruptcy system requires expertise. A good bankruptcy lawyer can look at your specific numbers, explain how your state’s laws apply to you, discuss the pros and cons of Chapter 7 versus Chapter 13 for your situation, and help you make the best decision for your future. Many attorneys today offer an initial free consultation by phone or email, and it’s important to understand the attorney-client relationship, including how they handle your information under their privacy policy and what legal fees are involved. Do not hesitate to contact attorneys today.

What If Bankruptcy Isn’t the Right Fit, But I Want to Keep My Home?

Sometimes, after looking at all the factors, bankruptcy might not be the best path for debt relief, especially if keeping your home is your absolute top priority and bankruptcy rules don’t favor that in your specific situation (like having very high nonexempt equity that makes a Chapter 13 payment plan unaffordable). Are there other bankruptcy alternatives to explore to avoid bankruptcy?

You could try to negotiate a loan modification with your mortgage lender. This might involve changing the terms of your loan, like the interest rate or the loan period, to make your mortgage payment more manageable. Lenders are sometimes willing to work with borrowers to avoid foreclosure, perhaps offering a forbearance period as well.

Refinancing your mortgage is another theoretical option, but this can be difficult if you’re already in financial trouble, as your credit score might be too low, or your income might not support a new loan. If you have substantial equity, a cash-out refinance to pay off other debts might be possible for some, but it also increases your mortgage debt and reduces your home equity.

If you have enough equity and some time before a foreclosure sale, you might consider selling the home yourself (sell property). This allows you to control the sale process, potentially get a better price than a forced sale by a real estate agent working for a trustee, pay off the mortgage, and keep any remaining exempt equity plus whatever you can negotiate. Then you could downsize or rent, free from the mortgage burden and potentially other bankruptcy debt if the sale proceeds are sufficient.

A debt management plan (DMP) through a reputable non-profit credit counseling agency is another non-bankruptcy option. With a DMP, you make one monthly payment to the agency, which then distributes it to your creditors, often at lower interest rates. This usually focuses on unsecured debts and doesn’t directly protect your home from foreclosure if you’re behind on the mortgage, nor does it provide the broad protection of the automatic stay found in bankruptcy. However, freeing up cash flow can help you afford your mortgage payments and other essential expenses.

Conclusion

So, can you file bankruptcy if I have equity in my home? Yes, it is absolutely possible. But as you’ve seen, whether you can keep your home through that process is not a simple question, and protecting equity requires careful planning. It hangs on a balance of the specific bankruptcy chapter you choose, the precise amount of equity you hold, the all-important homestead exemption laws in your state (which may differ from federal homestead provisions), and your ability to keep up with mortgage payments.

Filing bankruptcy if I have equity in my home requires a very careful look at all these details of your property bankruptcy. Because your home is likely your most significant asset, and the emotions tied to it are strong, getting personalized advice from a qualified local bankruptcy lawyer in your area is the very best next step you can take. They can help you understand your specific situation regarding your bankruptcy debt, the impact of potential tax liens, how being part of a married couple affects filing, and guide you towards a solution that makes sense for you and your family, helping you meet your financial goals until your bankruptcy case is closed.

Request your free consultation today at 212-244-2882. Mr. William Waldner is an experienced bankruptcy attorney in NY who can help you navigate bankruptcy while keeping your home.