This is a common question among debtors who either don’t own their home, or are still making mortgage payments. Some homeowners worry about what will happen to their house when they file chapter 7 bankruptcy. It helps to understand your options prior to filing based on your unique situation. In most cases, debtors end up keeping their home when they file, while meeting necessary requirements in order to do so.
One of the most important aspects in understanding how your home can be protected in bankruptcy includes knowing the amount of equity in your home and how to protect it. If you are making mortgage payments on your home you may have an amount of equity that is considered exempt. Meaning, a creditor couldn’t use this amount to satisfy outstanding debt owed. A homestead exemption allows homeowners to protect equity in their home from creditors. Each state has a specific level or amount in which protection is offered to debtors.
The exemption is at the state level, but at the federal level, additional protection may be available. In some cases, you may qualify to utilize one or both exemptions depending on whether your state will allow it. For instance, if your state offers home equity protection up to a certain amount, a federal exemption (or wildcard exemption) may be applied to help protect any equity remaining. There are also exemptions for other items such as household goods, jewelry, retirement accounts, vehicles, and other personal assets.