What Happens in Bankruptcy If I Own My Home Outright?

by Chris Blank Google
If you file Chapter 7 bankruptcy, you may lose your home even if you own it outright.

If you file Chapter 7 bankruptcy, you may lose your home even if you own it outright.

David Sacks/Lifesize/Getty Images

If you're considering bankruptcy, you're naturally concerned about what you can keep and what may have to surrender. If you own your home outright, you may or may not lose it if you file bankruptcy. Several factors, including the laws of your state, determine the final outcome of your bankruptcy petition.

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Chapter 7 Bankruptcy

Chapter 7 bankruptcy provides a means for debtors who have limited assets and income to make a fresh financial start by eliminating most, if not all, of their debts. To qualify for Chapter 7, debtors must pass a "means test," which compares their incomes and expenses to the incomes and expenses of households within the state of similar size. Although Chapter 7 bankruptcy involves liquidating a debtor's assets, you still need some possessions and assets to get your life back on track. Debtors are entitled to certain exemptions -- including a homestead exemption. Exempt assets are not subject to liquidation. When a debtor files a Chapter 7 bankruptcy petition, she surrenders only her nonexempt assets to the trustee for liquidation. The cash proceeds are then distributed to creditors, after which the debtor receives a discharge from any remaining debt. However, many Chapter 7 petitions are "no asset" bankruptcies because debtors actually have few or no assets available for liquidation.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows debtors who have regular incomes and who do not qualify for Chapter 7 bankruptcy to reorganize their debts into a payment plan developed with creditors. With Chapter 13, debtors make payments to a bankruptcy trustee, who then makes distributions to their creditors. Chapter 13 also protects co-signers to a debtor's non-secured debts, such as credit card debt, through a special third-party provision. Chapter 13 bankruptcies often result in debtors paying a lower overall amount than they would have paid had they not filed bankruptcy.

The Homestead Exemption

The homestead exemption varies by state; the federal government has its own homestead exemption. Some states allow you to choose either federal exemptions or your state exemptions. A few states offer no state homestead exemption, so you must use the federal exemption. Further, some states -- -- Florida, Texas, Kansas, Iowa, and South Dakota -- provide an unlimited dollar value homestead exemption, so if you live in one of those states, it's possible that you can keep you home, no matter how much it's worth. However, before you can opt for your state homestead exemption, you must live in your current home for at least 730 days prior to filing your bankruptcy petition. You also have to keep in mind that you can only claim a maximum of $136,875 as a homestead exemption regardless of your state's homestead law if you haven’t lived in the home for at least 1215 days prior to the date of filing. The bottom line is that whether or not you can keep your home when you file bankruptcy depends on several factors including where you live, how much your home is worth, and how long you've lived in your home. A bankruptcy estate that is subject to liquidation may include your home.

Chapter 13 and Liquidation

If you own your home outright, and you have lived there for less than 1215 days, you are more likely to be able to keep your home if you file Chapter 13 bankruptcy than Chapter 7. This is because Chapter 13 does not require liquidation of your assets to pay creditors. You can schedule a payment plan to settle your debts that results in a single monthly payment that may be less than the combined total of your present bills.