Will I Lose My House If I Declare Personal Bankruptcy?

Written by M.C. Postins; Updated June 19, 2017

In many cases, you can file for bankruptcy and still keep your home. You are usually allowed to keep property that you need, such as a place to live. The amount of equity you have in your home will be a determining factor in whether you’ll be able to keep it.

Determine Equity and Exempt Status

When you file for bankruptcy, you are allowed to keep some property, called exempt property. If the equity in your home is fully exempt, you should be able to keep it. You can figure out your equity by taking your home’s fair market value and subtracting the loans and liens on the property. For example, if your home is worth $500,000 and your mortgage debt is $420,000, then your equity is $80,000. At the time of publication, California lets you keep $100,000 as exempt property if a family lives in the home. Since the state exemption is greater than your equity, you can stop the bankruptcy trustee from selling your home. If, however, the exemption was only $75,000, it’s likely the bankruptcy trustee would sell the home to pay off your creditors.

When You File Chapter 7

Chapter 7 is also called liquidation bankruptcy. The bankruptcy trustee handling your case is obligated to sell off any non-exempt assets to pay off creditors. This is why determining the non-exempt equity in your home is important. Where you stand on your mortgage payments is also a consideration. If you are current on your payments, you are more likely to keep your home. If you are not, you are more likely to lose it. If you fall 90 days or more behind on your mortgage, the lender can foreclose. Even with the automatic stay associated with filing for bankruptcy, if you are not able to cure the amount you owe on the mortgage, you can lose the home.

When You File Chapter 13

Chapter 13 is designed to work out a payment plan with lenders for secured and unsecured debt over a three- to five-year period. It is more likely that you’ll be able to keep your home in a Chapter 13, because the bankruptcy trustee will roll the amount of money that you owe your lender into the repayment settlement. During the payment plan, you must not only repay the money mandated by your trustee, but also keep your mortgage payments current, in order to keep your home. If you pay on time through the length of the plan, you are out of bankruptcy and can keep your home. If you fall behind on your trustee payments or your mortgage payments again, you can lose the home.

Second Mortgages

If you file for bankruptcy and have two mortgages, it is possible to come out of the process with just one mortgage. In bankruptcy, second mortgages are not considered secured debt. The first lienholder on the home always has priority. The second mortgage holder would only benefit from a bankruptcy settlement if the first lienholder was satisfied. If the value of your home has fallen below the balance of your first mortgage, your trustee is allowed to remove the second mortgage entirely if you keep the home.

Letting the Home Go

In some cases, bankruptcy attorneys advise clients to walk away from the home, even if they file for bankruptcy. If you owe more than the home is worth, or if it would cost less to rent a comparable property, it may not be worthwhile to keep the home. In bankruptcy, you are allowed to surrender the property and walk away from it, but you must make that declaration during the bankruptcy process.

About the Author

M.C. Postins


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