You can file Chapter 7 with equity in your home, and in many cases you can keep the house. Whether you keep it comes down to one question: does your homestead exemption cover all of your equity? If it does, the trustee has no reason to sell. If a slice of equity sits outside the exemption, that slice is at risk.
Figure Out How Much Equity Is Actually at Risk
Equity is the fair market value of your home minus every mortgage and lien against it. Home equity loans count. Tax liens and mechanics liens count. If your home would sell for $300,000 and you owe $220,000, your equity is $80,000.
From that equity, subtract the homestead exemption you qualify for. What’s left is your non-exempt equity, and that’s the number the Chapter 7 trustee cares about. Say your home is worth $350,000, you owe $250,000, and your homestead exemption is $75,000. Equity is $100,000. Non-exempt equity is $25,000.
Getting the value right matters. A professional appraisal runs a few hundred dollars and gives you a defensible figure. Overestimating by $15,000 can be the difference between keeping the home and losing it. Recent comparable sales in your neighborhood are another reasonable benchmark, and the trustee may order their own appraisal if they doubt yours.
The Homestead Exemption That Shields Your Equity
A homestead exemption puts a set dollar amount of equity in your primary residence off-limits to the trustee. It applies to the home you live in. Vacation homes, rentals, and investment property don’t qualify.
State or Federal
Every state has its own homestead exemption, and the amounts vary enormously. Some protect tens of thousands; a few protect unlimited equity. There is also a federal bankruptcy exemption system with a homestead exemption of $31,575.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
You don’t always get to choose. A majority of states have opted out of the federal exemptions, so if you live in one of those states, you must use the state list.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions In states that permit the choice, you pick one system and use it for everything. You cannot take the homestead exemption from one list and other exemptions from the other.
Doubling for Joint Filers
Married couples filing jointly can double the federal exemption, protecting up to $63,150 of home equity.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions Many state systems allow similar doubling, with rules that differ by state. Both spouses generally need to be on the title.
The Wildcard
If you use the federal system, you also get a wildcard exemption worth $1,675 that can be applied to any property. More useful for homeowners: up to $15,800 of unused homestead exemption can be rolled into the wildcard.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions If your equity is only $20,000 and the $31,575 homestead exemption more than covers it, the leftover can protect other assets like a car or bank account. If your equity slightly exceeds the homestead cap, the wildcard can close the gap.
Residency Rules and the 1,215-Day Cap
Two federal rules limit exemption shopping, and both catch people off guard.
To use a state’s exemptions, you must have lived there at least 730 days (two years) before filing. If you moved more recently, you’ll generally use the exemptions of the state where you lived during the 180 days before that 730-day window. If that chain leaves you with no exemption option at all, you can fall back on the federal list.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
If you acquired the home within 1,215 days (about 40 months) before filing, your homestead exemption is capped at $214,000 regardless of what state law would otherwise allow.2Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases The cap exists to stop people from buying a home in a generous-exemption state right before filing. Equity rolled over from a previous home in the same state is not subject to the cap, so long-time residents who recently upgraded typically aren’t affected.
Strip Judgment Liens That Shrink Your Exemption
If a creditor sued you and won before you filed, a judgment lien may already be attached to your home. That lien cuts into your equity and can push your non-exempt amount higher than it needs to be. Bankruptcy law lets you remove judicial liens that impair your homestead exemption.1Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
You file a motion asking the court to avoid the lien. The court compares the sum of all liens plus your exemption against the home’s value. If that sum exceeds what the property is worth, the judgment lien impairs your exemption and can be reduced or wiped out. This works even when you’re underwater on the mortgage. Tax liens and purchase-money mortgages cannot be removed this way; this tool is aimed at unsecured creditors who turned a judgment into a lien.
What the Trustee Does With Non-Exempt Equity
Having some non-exempt equity does not automatically mean the trustee sells your home. Chapter 7 is a liquidation, and the trustee’s job is to turn unprotected property into cash for creditors.3Office of the Law Revision Counsel. 11 U.S. Code 704 – Duties of Trustee But the trustee has to run the numbers first.
A sale means paying off the mortgage, cutting you a check for the exempt portion, paying real estate commissions and closing costs, and taking the trustee’s statutory fee. Only what’s left reaches unsecured creditors. If your non-exempt equity is $5,000, there’s rarely enough on the other side of those costs to bother. In that case the trustee abandons the property, formally declaring it of inconsequential value to the estate.4Office of the Law Revision Counsel. 11 U.S. Code 554 – Abandonment of Property of the Estate Once abandoned, the home stays yours as long as you keep paying the mortgage.
If non-exempt equity is substantial, the trustee will sell. Proceeds go first to the mortgage and other lienholders, then you receive your exemption amount in cash, then the trustee’s costs and fee come out, and whatever remains goes to unsecured creditors. The practical threshold where trustees pull the trigger varies by region, and a local bankruptcy attorney will know where yours draws the line.
Protecting the Exemption Is Only Half the Job
You still have to keep paying the mortgage. Chapter 7 wipes out your personal liability for the debt, but it does not touch the lender’s lien. Miss payments and the lender can foreclose.
The Automatic Stay
Filing triggers an automatic stay that halts collection activity, including any pending foreclosure.5Office of the Law Revision Counsel. 11 U.S. Code 362 – Automatic Stay It’s breathing room, not a permanent fix. If you’re behind, the lender can ask the court to lift the stay and resume foreclosure.
Reaffirmation
Your mortgage lender may ask you to sign a reaffirmation agreement, a new contract keeping you personally liable for the mortgage despite the discharge.6Office of the Law Revision Counsel. 11 U.S. Code 524 – Effect of Discharge Think carefully. If you reaffirm and later default, the lender can foreclose and sue you for any deficiency. If you don’t reaffirm, personal liability is discharged; the lien survives, so the lender can still foreclose if you stop paying, but it generally cannot pursue you for a deficiency afterward.
Many homeowners skip reaffirmation and simply keep paying. The lender has little reason to foreclose on a borrower who pays on time, and not reaffirming preserves one of bankruptcy’s core protections.
When Chapter 13 Is the Better Move
If your non-exempt equity is large enough that the trustee will sell, Chapter 13 is usually the better route. Chapter 13 is a reorganization: you keep your property and pay creditors through a court-approved plan lasting three to five years.7United States Courts. Chapter 13 Bankruptcy Basics
The catch is the “best interest of creditors” test. Unsecured creditors must get at least as much through your plan as they would have received in a Chapter 7 liquidation.8Office of the Law Revision Counsel. 11 U.S. Code 1325 – Confirmation of Plan If you have $40,000 in non-exempt equity, your plan payments to unsecured creditors have to total at least $40,000 over the plan’s life. That’s a real cost, but it stretches over years instead of forcing you to surrender the house. Chapter 13 also lets you catch up on missed mortgage payments through the plan, which Chapter 7 cannot do.
One last note: home equity isn’t the only thing that determines whether Chapter 7 is open to you. You still have to pass the means test and complete pre-filing credit counseling. If your income is too high or your paperwork is incomplete, Chapter 13 may be your only option regardless of what your home equity looks like.