In most bankruptcy cases, you do not have to sell your house when you file bankruptcy. Whether you keep it comes down to three things: how much equity you have in the home, which homestead exemption applies where you live, and whether you file under Chapter 7 or Chapter 13. Homeowners with modest equity almost always keep the house in Chapter 7. Homeowners with substantial equity, or with missed mortgage payments to catch up on, typically use Chapter 13 to hold onto it.
Equity and the Homestead Exemption Decide the Outcome
Your home equity is the difference between the market value of the house and what you still owe on the mortgage. A $300,000 home with a $220,000 mortgage balance carries $80,000 in equity. That equity is an asset in your bankruptcy case, and it is what creditors would want access to.
The homestead exemption is what stops them. It shields a set dollar amount of your equity from the bankruptcy process. If your equity falls within that protected amount, the trustee has no financial reason to sell the house, because after paying off the mortgage and returning your exempt share, nothing would be left for creditors.
The federal homestead exemption protects up to $31,575 in equity per person for cases filed between April 1, 2025, and March 31, 2028. A married couple filing jointly can double that to $63,150.1Office of the Law Revision Counsel. 11 USC 522 – Exemptions It covers a primary residence, including condominiums, co-ops, and mobile homes used as a dwelling.
Every state also has its own homestead exemption, and the amounts vary enormously. A handful of states protect unlimited equity in a primary residence. Others cap protection well below the federal figure. About two-thirds of states have opted out of the federal system entirely, so residents must use the state exemptions whether or not the federal amount would be better.1Office of the Law Revision Counsel. 11 USC 522 – Exemptions Where you can choose, compare both sets carefully before filing. You cannot mix the two.
What Happens to Your Home in Chapter 7
Chapter 7 is a liquidation. A court-appointed trustee reviews everything you own, identifies assets worth more than your exemption limits, and sells those assets to pay unsecured creditors. The trustee applies the same test to your house.
If your home equity is at or below the homestead exemption available to you, the trustee will not touch the house. There is no money in it for creditors. You keep the home and continue with your mortgage as before. This is the outcome for most homeowners in Chapter 7, because many people filing have relatively little equity.
If your equity exceeds the exemption, the trustee can sell. Take that $80,000 equity example against a $31,575 exemption. The trustee sees roughly $48,000 in non-exempt equity, sells the property, pays off the mortgage, hands you a check for the exempt amount, and distributes the rest to creditors. Trustees do weigh the cost of sale (real estate commissions, closing costs, their own fees), so a small amount of non-exempt equity is sometimes not worth pursuing. But the risk is real. Anyone whose equity sits well above their exemption limit should think hard about Chapter 13 instead.
Chapter 13 Is Built to Keep the House
Chapter 13 does not liquidate. You propose a repayment plan lasting three to five years, make monthly payments to a trustee, and the trustee distributes the money to your creditors.2United States Courts. Chapter 13 – Bankruptcy Basics The house stays in your hands throughout.
There is a cost. The “best interest of creditors” test requires your plan to pay unsecured creditors at least as much as they would have received in a Chapter 7 liquidation.3Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan If you have $48,000 in non-exempt home equity, your plan must distribute at least $48,000 to unsecured creditors over its life. You keep the house, but your monthly plan payment rises accordingly. The Chapter 13 trustee also collects a fee on every plan payment, up to a statutory maximum of 10 percent.4Office of the Law Revision Counsel. 28 USC 586 – Duties; Supervision by Attorney General Paying $48,000 over 60 months works out to at least $800 per month before the trustee’s cut and your ongoing mortgage payment.
Catching Up on Missed Mortgage Payments
Chapter 13 lets you cure a mortgage default. If you have fallen behind and the lender is moving toward foreclosure, your plan can spread the missed payments (called arrears) across its full length while you resume regular payments going forward.5Office of the Law Revision Counsel. 11 USC 1322 – Contents of Plan This right lasts until the foreclosure sale is actually completed under state law. Once the sale happens, the window closes.
Stripping a Second Mortgage
Chapter 13 can also eliminate a second mortgage or other junior lien when the home is worth less than the first mortgage balance alone. In that situation the court can reclassify the junior lien as unsecured, which gets paid through the plan at whatever percentage other unsecured creditors receive, and any remaining balance is discharged when the plan finishes.6Office of the Law Revision Counsel. 11 USC 506 – Determination of Secured Status If even a dollar of home value supports the junior lien, this does not work.
The Mortgage Is a Separate Problem
Protecting your equity through an exemption and keeping the house are not the same thing. The homestead exemption stops the bankruptcy trustee from selling. It does nothing to your mortgage lender. A mortgage is secured debt, and the lien survives bankruptcy. Stop paying, and the lender can eventually foreclose no matter what happened in your case.7Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge
The Automatic Stay Buys Time
Filing the petition triggers an automatic stay that halts most collection activity, including foreclosure proceedings, lawsuits, and wage garnishments.8Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay The pause is real but not permanent. Mortgage lenders can ask the court to lift the stay if you fall behind. In Chapter 13, most lenders tolerate one missed payment. Two months behind often triggers a motion to lift the stay. Three months behind almost always will. If the court grants that motion, foreclosure proceeds as though the bankruptcy had never been filed.
Reaffirmation or Just Keep Paying
In Chapter 7, the discharge wipes out your personal obligation on the mortgage, but the lien stays. You have two practical options. One is reaffirmation, a new agreement with the lender that keeps you personally liable for the debt as if the bankruptcy had not touched it. Reaffirmation agreements on mortgages do not require court approval, but they must be signed before discharge, and you can cancel within 60 days.7Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge
The other option is to keep paying without reaffirming. Many homeowners do this successfully. On-time payments give the lender no reason to foreclose. If you reaffirm and later default, the lender can pursue you for a deficiency balance. If you skip reaffirmation and later default, you walk away owing nothing beyond the house itself. The downside of not reaffirming is that some lenders will not report your payments to credit bureaus, which slows credit rebuilding.
Two Rules That Can Shrink Your Protection
Congress built anti-abuse provisions into the code to stop people from relocating or buying property just to shelter assets. Two matter for homeowners.
The first is the 730-day domicile rule. You must have lived in your current state for at least 730 days (roughly two years) before filing to claim that state’s homestead exemption. If you moved more recently, the exemptions from your previous state apply, based on where you lived for most of the 180 days before the 730-day window.1Office of the Law Revision Counsel. 11 USC 522 – Exemptions If neither state’s exemptions work in your favor, you can fall back on the federal set.
The second is the cap on recently purchased homes. Even in a state with unlimited homestead protection, if you acquired the property within 1,215 days (about three years and four months) before filing, federal law caps the exemption at $214,000.1Office of the Law Revision Counsel. 11 USC 522 – Exemptions The cap does not apply if you rolled equity from a prior home in the same state into the new property, and it does not apply to family farmers protecting their principal residence.
If your equity is modest, your homestead exemption covers it, and you can keep paying the mortgage, the answer to whether bankruptcy costs you the house is almost always no. If your equity is large, or if you are behind on payments, Chapter 13 gives you a way to hold on that Chapter 7 does not. The choice between the two chapters, more than the fact of filing itself, is what usually decides the outcome.