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Your Home in Chapter 7 Bankruptcy

What happens if you own a house and file for Chapter 7 bankruptcy?


Whether Chapter 7 bankruptcy makes sense when you own a home depends on your goals—do you want to save your house, delay foreclosure, or just walk away with less debt?

Most Chapter 7 bankruptcy filers can keep a home if they’re current on their mortgage payments and they don’t have much equity. However, it’s likely that a debtor will lose the home in Chapter 7 bankruptcy if there’s significant equity that the trustee can use to pay creditors. For those planning to walk away, filing can delay foreclosure for a short period.

Will the Bankruptcy Trustee Sell My Home?

You can keep your home in Chapter 7 bankruptcy if you don’t have any home equity or you’re able to exempt (protect) your equity using the homestead exemption (discussed below). The  bankruptcy trustee appointed to administer your matter won’t sell it because, without available equity, there wouldn’t be any money to distribute to your unsecured creditors.

But that doesn’t mean you’ll be able to keep the home. You must be current on your monthly payments when you file for bankruptcy (or shortly after that) and must be able to stay current going forward. Otherwise, you’ll risk losing your home through foreclosure (more below).

Also, it’s important to realize that as the real estate market recovers, home values can go up quickly. So even though it was rare after the 2008 recession for a Chapter 7 bankruptcy debtor to have enough nonexempt equity in a home to trigger a sale, it’s not necessarily the case in a healthy market. In fact, many debtors might find that in a hot real estate market, home equity rises so quickly that it could exceed allowed exemption amounts in a matter of months.

Here’s a system that will help you determine whether the bankruptcy trustee is likely to sell your home.

Step One: Identify the property.

When you file for bankruptcy, you’re allowed to keep (exempt) the equity in certain types of property. The homestead exemption protects a specified amount of equity in your home or permanent place of residence.

You can claim the homestead exemption on one piece of residential property only. In most cases, the property must be your primary residence. However, under some state's exemption schemes, you can use the homestead exemption to protect a residential trailer or burial plot.

Step Two: Determine the amount of your homestead exemption.

Each state has a system of bankruptcy exemptions that a bankruptcy filer can use to protect property. Most states have a homestead exemption amount based on dollar value, but some states limit the number of acres you can protect from creditors.

The amount of your homestead exemption will depend on several factors, including where and when you bought the home, whether the state in which you’re filing allows you to use the federal exemptions, and whether you’ve moved within the last few years.

Here are a few concepts to be aware of:

  • State homestead exemption. In Alabama, the Real Property exemption is also known as the Homestead exemption.  The homestead exemption protects a specified amount of the value of the personal residence owned by an individual.  Presently in Alabama, the homestead exemption is $15,000 for each individual who is an owner of the personal residence.  Therefore, married couples who are both on the deed can exempt up to $30,000.

Step Three: Is there enough unprotected home equity to trigger a sale?

Start with the fair market value of your home and subtract the following:

  • the homestead exemption amount you’re entitled to claim 
  • the trustee's commission on the difference (25% of the first $5,000, 10% of the next $50,000, and 5% of the rest, up to one million)
  • the costs of sale (usually around 8% of the fair market value)
  • the amount owed on all mortgages, and
  • the amount of all nonmortgage liens secured by the home (such as a tax lien).

If you end up with a negative number, you don’t have sufficient equity to trigger a sale, which essentially means that the Chapter 7 bankruptcy trustee won’t have an incentive to sell your home. Since there won't be anything leftover to be used to pay the unsecured creditors, the trustee will abandon the property.

If you end up with a positive number, this is the amount of equity that the bankruptcy trustee could use to pay your unsecured creditors. In this case, the Chapter 7 bankruptcy trustee might sell your home, give you the amount of the homestead exemption, pay off mortgage and lien holders, and use the rest to pay off unsecured creditors.

Losing Your Home in Bankruptcy v. Losing Your Home in Foreclosure

You’ll want to be able to distinguish between losing your home in bankruptcy (which happens when the bankruptcy trustee sells your home to pay unsecured creditors) and losing your home outside of bankruptcy (that is, through the foreclosure process). These are two separate processes.

If you’re behind on your mortgage payments, you’ll eventually lose your home in foreclosure outside of bankruptcy, even if the bankruptcy trustee doesn’t sell your home.

Can Chapter 7 Bankruptcy Help With Foreclosure?

Chapter 7 bankruptcy might provide temporary relief from foreclosure, but it won’t help you keep the home. It doesn’t have a mechanism to pay off arrears or permanently stop the foreclosure.

Here are some options to consider:

  • Negotiate with your lender before bankruptcy. If you are behind on mortgage payments, you might be able to negotiate with the lender to deal with the shortfall, either informally or through a more formal "mortgage workout" where the lender agrees to renegotiate payments terms by modifying the loan or refinancing. If you go this route, complete the loan modification before you file for bankruptcy. Otherwise, the bankruptcy will likely disrupt any ongoing negotiations. (You’ll find information about lender negotiation and loan modifications in Foreclosure.)
  • Consider Chapter 13 bankruptcy. If you’ve fallen behind on your payments but now have enough income to catch up on the mortgage arrearage over time, you can save your home in a Chapter 13 Bankruptcy.

Speak to an Experienced GADSDEN ALABAMA Bankruptcy Attorney Today

This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified bankruptcy lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact Dani Bone & Sam Bone to discuss your specific legal situation at 256-547-1005




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