If you own a home and are considering bankruptcy, you can file without automatically losing the house. Filing bankruptcy when you own a home comes down to three variables: the chapter you file under, how much equity sits in the property, and how much of that equity your homestead exemption shields. Homeowners who are current on the mortgage and whose equity fits inside the exemption typically keep the house in both Chapter 7 and Chapter 13.
Equity and the Homestead Exemption Decide Most Cases
Equity is the difference between your home’s current market value and everything you owe against it. A $300,000 home with a $250,000 mortgage balance carries $50,000 in equity. The homestead exemption is the dollar amount of that equity the law lets you protect from creditors and the bankruptcy trustee.
Bankruptcy law offers a federal exemption system and separate state systems. Some states let you choose; others require you to use the state system. You pick one complete set, without mixing provisions.1Justia. Bankruptcy Exemption Laws
Amounts vary widely. The federal homestead exemption protects $31,575 in equity as of April 2025. Some states shield far more, a handful offer unlimited homestead protection within acreage limits, and a few provide none at all, which is why filers in those states often benefit from the federal option when available.2Office of the Law Revision Counsel. 11 US Code 522 – Exemptions
Which State’s Exemption You Get
You use the exemptions of the state where you’ve been domiciled for the 730 days (roughly two years) before filing. If you moved during that window, you use the exemptions of whichever state you lived in for the majority of the 180 days before those 730 days. If the formula leaves you eligible nowhere, the federal system is the fallback.2Office of the Law Revision Counsel. 11 US Code 522 – Exemptions
A separate rule limits recent buyers. If you acquired your homestead interest within the 1,215 days (about three years and four months) before filing, your homestead exemption is capped at $214,000 regardless of what the state allows. The cap doesn’t apply if you rolled equity from a previous home in the same state, and it doesn’t apply to family farmers.2Office of the Law Revision Counsel. 11 US Code 522 – Exemptions
Chapter 7 When You Own a Home
Chapter 7 is a liquidation. A court-appointed trustee reviews your assets, sells anything not protected by an exemption, and distributes the proceeds to creditors.3United States Courts. Chapter 7 Bankruptcy Basics For a homeowner, the math is direct. If your equity fits entirely inside your homestead exemption, the trustee has no financial reason to touch the house. The trustee will abandon it, and you keep the home as long as you’re current on the mortgage.
Trouble starts when equity exceeds the exemption. Say you have $90,000 in equity and $50,000 in exemption. The $40,000 gap is non-exempt equity, and the trustee can sell the property to reach it. From the sale, the trustee pays off the mortgage, gives you the cash value of your exemption, deducts fees and selling costs, and distributes what remains to unsecured creditors.
Trustees do weigh whether a sale is worth the trouble. If non-exempt equity is small, selling costs may eat most of the surplus and the trustee often abandons the property. That’s a judgment call, not a guarantee, so don’t count on it when the gap is meaningful.
Not every homeowner qualifies for Chapter 7. Federal law requires a means test comparing your income to your state’s median. Below the median, you qualify. Above it, you complete a detailed calculation of expenses and disposable income, and filers who don’t pass are generally steered toward Chapter 13.
What You Tell the Court About the Mortgage
Chapter 7 filers must file a Statement of Intention describing what they plan to do with property that secures a debt.4United States Courts. Statement of Intention for Individuals Filing Under Chapter 7 For the home, three choices matter:
- Reaffirm the debt. You sign a new agreement keeping you personally liable for the mortgage after bankruptcy. It’s the common choice for people who want to keep the home and continue building payment history. The risk is real: if you later default, the lender can foreclose and sue you for any deficiency, because you gave up the discharge on that debt.
- Retain and pay voluntarily. You keep making payments without a reaffirmation agreement. Your personal liability gets discharged, but the lien remains. If you stay current, many servicers leave you alone; if you later stop paying, the lender can foreclose but cannot pursue a deficiency. Not every lender cooperates with this route.5American Bankruptcy Institute. Reaffirm, Redeem, Retain and Pay or Surrender Property in Chapter 7 Bankruptcy
- Surrender the property. You give the home back to the lender and your personal liability on the mortgage is discharged. It’s the path for homeowners who are deeply underwater or want a clean break.
A signed reaffirmation isn’t final. You can cancel it by the later of two dates: 60 days after the agreement is filed with the court, or the date the court grants your discharge. You cancel by written notice to the lender before that deadline.6Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge
Chapter 13 When You Own a Home
Chapter 13 is built for homeowners who need breathing room. Instead of liquidating, you propose a repayment plan spanning three to five years and make monthly payments to a trustee, who distributes them to your creditors.7United States Courts. Chapter 13 – Bankruptcy Basics You keep your property throughout.
The most useful feature for homeowners behind on payments is curing a mortgage default. If you owe $12,000 in missed payments, your plan can spread that arrearage across the full plan period while you resume regular monthly mortgage payments going forward.8Office of the Law Revision Counsel. 11 US Code 1322 – Contents of Plan You can cure a default this way right up until the home is actually sold at a foreclosure sale.
The plan also has to satisfy the “best interests of creditors” test: unsecured creditors must receive at least what they would have received under a Chapter 7 liquidation.9Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan With $30,000 in non-exempt home equity, your plan payments to unsecured creditors must total at least $30,000 over the plan’s life. You keep the home, but you pay for the privilege.
Stripping a Second Mortgage
Chapter 13 offers a tool Chapter 7 does not: lien stripping. If you have a second mortgage or home equity loan and your home’s current value is less than what you owe on the first mortgage alone, the junior lien is wholly unsecured. The court can strip it from the property and reclassify the debt as unsecured, alongside credit cards and medical bills in your repayment plan.10Justia. Lien Stripping Under Chapter 13 Bankruptcy Law
The junior lien must be entirely unsecured. If the home is worth even a dollar more than the first mortgage balance, the second lien is partially secured and cannot be stripped. Lenders can challenge the valuation, and the court may hear appraiser testimony. Complete the full plan and the junior mortgage is permanently eliminated; fail to complete it and the lien snaps back.10Justia. Lien Stripping Under Chapter 13 Bankruptcy Law
The Automatic Stay Stops Foreclosure Immediately
The moment you file any bankruptcy petition, an automatic stay takes effect. It’s a federal court order that immediately halts foreclosure proceedings, collection calls, wage garnishments, and lawsuits on pre-filing debts.11Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay For a homeowner facing an imminent foreclosure sale, that pause can be decisive.
In Chapter 7, the stay lasts until the case closes, is dismissed, or a discharge is granted, typically three to four months. In Chapter 13, it remains through the plan as long as you keep up with plan payments and ongoing mortgage obligations. A lender can ask the court to lift the stay if you fall behind during the case.
Tax Treatment of Discharged Debt
Outside bankruptcy, when a lender forgives or writes off debt, the IRS generally treats the cancelled amount as taxable income. Bankruptcy changes that. Debt discharged through a Title 11 case is excluded from gross income entirely, so you owe no federal income tax on it.12Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
You claim the exclusion by filing IRS Form 982 with the tax return for the year the discharge occurs. The form reports the excluded amount and adjusts certain tax attributes, including net operating losses and basis in property.13Internal Revenue Service. About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness If you surrender the home and the lender cancels a remaining balance inside the bankruptcy, no surprise tax bill follows. That’s a genuine advantage of filing formally rather than negotiating debt forgiveness on your own.
What Bankruptcy Does to Your Credit
A Chapter 7 stays on your credit report for up to ten years from the filing date. A Chapter 13 typically remains for seven. Any lender reviewing your credit during that window will see it, which affects rates and approval odds. Most filers see scores begin recovering well before the bankruptcy drops off, particularly with steady payments on any reaffirmed debt and careful management of new credit.