Bankruptcy when you own a home

How does bankruptcy actually treat a home you own?

When you file, nearly everything you own becomes part of a bankruptcy estate, including your house (11 U.S.C. § 541). You then claim exemptions — the property the law allows you to keep out of the reach of creditors (11 U.S.C. § 522). Exemptions are not automatic. You must list the property on Schedule C, and if you do not list it, the trustee may sell it and pay the proceeds to your creditors (Bankr. S.D. Iowa official guidance — Instructions - Bankruptcy Forms for Individuals). Two further points shape a homeowner's case. First, a discharge relieves you of personal liability on debts, but it does not eliminate a mortgage or security interest in the property (U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter: What can Bankruptcy do for you? What will it do to you?). Second, under both chapters you generally have to keep paying a debt secured by property you want to keep.

What changes the answer for one homeowner and not another?

Equity, not sale price, is what a trustee looks at: what the home would bring, minus the mortgages and liens recorded against it. For exemption purposes, value means fair market value as of the date the petition is filed (11 U.S.C. § 522(a)(2)). Several other facts commonly move the outcome, which is why two neighbours with the same house can end up in very different cases.

• How much equity sits above the mortgage balance and any other liens.
• Whether the mortgage is current, behind, or already in foreclosure.
• Which chapter fits — liquidation under Chapter 7 or a repayment plan under Chapter 13.
• Which state's exemptions apply, which depends on where your domicile has been before filing (11 U.S.C. § 522(b)(3)(A)).
• How title is held: an interest as a tenant by the entirety or joint tenant may be exempt to the extent it is exempt from process under applicable non-bankruptcy law (11 U.S.C. § 522(b)(3)(B)).

What does federal law say about a home in bankruptcy?

Four provisions do most of the work. Section 541 pulls your legal and equitable interests, including real estate, into the estate. Section 522 lets an individual debtor exempt property, choosing either the federal list in § 522(d) or the exemptions available under federal, state and local law where the debtor is domiciled — unless state law removes the federal option. Section 522 also contains a limit, § 522(p), on a homestead exemption claimed in property acquired shortly before filing; that cap is adjusted periodically and we do not publish a verified current figure here (W.D.N.C. LBR 9029-1). Section 362 provides the automatic stay: filing operates as a stay of acts to obtain possession of estate property, to enforce a pre-petition judgment, and to create, perfect or enforce a lien against estate property. Section 521(a)(2) requires an individual with debts secured by estate property to file a statement of intention to retain or surrender it.

Where do state or local rules change things?

Exemption law is where the homeowner answer becomes state-specific. Section 522(b) lets each state decide whether its residents may use the federal exemption list, and many states have opted out. Alabama provides that in a bankruptcy case only property exempt under Alabama law and under federal law other than § 522(d) is exempt (Ala. Code § 6-10-11). California states that the § 522(d) exemptions are not authorized there (Cal. Civ. Proc. Code § 703.130). Illinois likewise prohibits residents from using the federal exemptions (735 ILCS 5/12-1201). Local practice can matter too. Court guidance in Arizona warns that a debtor filing to save a home from foreclosure must do so before the foreclosure sale is completed under Arizona law (U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter). Homestead amounts, procedures and deadlines vary, so check your state hub and your district's local rules rather than a national figure.

What does this look like in practice for a homeowner?

In a Chapter 7 case, the trustee may sell property to pay creditors, subject to your right to exempt the property or a share of the sale proceeds; exemptions may enable a debtor to keep a home, a car and household items, or to receive some proceeds if the property is sold (U.S. Bankr. Ct. D. Ariz., Instructions for Completing the Bankruptcy Petition, Schedules and Statements). Where equity is fully covered by an exemption and the mortgage is current, the practical issue is usually just continuing to pay the loan and keeping insurance in place. Where the problem is arrears rather than equity, Chapter 13 is the more common route: it can be used to cure defaults on secured debts, including defaults on home mortgages (U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter), and generally offers the opportunity to catch up on arrearages of secured debt such as a mortgage (Pro Se Debtor Guide).

What documents and information are involved?

Section 521 sets out a debtor's duties: a list of creditors, schedules of assets and liabilities, schedules of current income and expenditures, a statement of financial affairs, recent evidence of payment from an employer, and a statement of monthly net income. A homeowner should expect to document the house specifically — a recent mortgage statement, the payoff figure, any second mortgage or home equity line, recorded liens or judgments, property tax status, and a defensible view of what the home is worth. You also file Schedule C to claim exemptions and, if debts are secured by estate property, a statement of intention under § 521(a)(2). Costs are separate from all of that. A Chapter 7 case carries a $245 filing fee (28 U.S.C. § 1930(a)(1)(A), (f)(1)). A Chapter 13 case carries a $235 filing fee, which the statute permits an individual to pay in installments (28 U.S.C. § 1930(a)(1)(B)).

What should you ask a lawyer if you own a home?

Home equity is one of the situations court guidance flags as hard to handle alone. A Maryland checklist tells pro se filers to tick a box if the value of their home exceeds the mortgages and unpaid taxes, or if they are facing foreclosure, and says that checking one or more boxes may mean issues that are difficult or impossible to resolve without a lawyer, and that a mistake could cost property or the discharge (Bankr. D. Md. official page — Bankruptcy Checklist). Useful questions to bring to a consultation:

• Given my equity and my state's exemptions, what happens to this house in each chapter?
• Am I better placed curing arrears in a plan than filing a liquidation case?
• Does the timing of when I acquired this home affect the exemption I can claim under § 522(p)?
• How does the way title is held affect what the estate can reach?
• What happens if a creditor asks the court for relief from the automatic stay under § 362(d)?

Frequently asked questions

Will filing for bankruptcy stop a foreclosure?

Filing generally triggers an automatic stay under 11 U.S.C. § 362, which commonly halts acts to obtain possession of estate property and to enforce liens against it. It is not permanent or unconditional: a secured creditor can ask the court for relief from the stay, and court guidance in Arizona warns that a foreclosure sale already completed under state law may put the home beyond reach.

Does a discharge wipe out my mortgage?

No. A discharge relieves you of personal liability for dischargeable debts, but it does not eliminate a mortgage or security interest in the property (U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter). Court guidance is explicit that a creditor may still have the right to foreclose a home mortgage after a discharge. If you want to keep the house, the loan generally still has to be paid.

How is home equity calculated for bankruptcy?

Broadly, it is what the home is worth minus what is secured against it. For exemption purposes, value means fair market value as of the date the petition is filed (11 U.S.C. § 522(a)(2)). Court filing instructions illustrate the arithmetic by subtracting a first mortgage from the value of a home, then a second mortgage from what remains, to show the unsecured portion.

Can I use the federal homestead exemption?

That depends on your state. Section 522(b) allows states to prohibit residents from using the federal list in § 522(d), and several have. Alabama, California and Illinois each bar their residents from the federal exemptions by statute. Where a state has opted out, the federal figures simply do not apply to you, and your state's own exemption law controls.

Do I lose the house if I do not list it?

Exemptions are not automatic. To exempt property you must list it on Schedule C, and court instructions warn that if you do not list it, the trustee may sell it and pay all of the proceeds to your creditors. Accuracy matters generally: § 521 requires complete schedules of assets and liabilities, and information supplied in a case is subject to examination.

Is Chapter 13 better for a homeowner who is behind?

Where the problem is missed payments rather than equity, Chapter 13 is commonly the route considered, because it can be used to cure defaults on secured debts including home mortgages (U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter). Chapter 7 does not provide that cure mechanism. Which fits depends on income, arrears, equity and exemptions, which is why homeowners are commonly advised to get local advice.

Sources

• 11 U.S.C. § 541 — Property of the estate · official source
• 11 U.S.C. § 522 — Exemptions · official source
• 11 U.S.C. § 362 — Automatic stay · official source
• 11 U.S.C. § 521 — Debtor's duties · official source
• 28 U.S.C. § 1930(a)(1)(A), (f)(1) — Bankruptcy filing fees — Chapter 7
• 28 U.S.C. § 1930(a)(1)(B) — Bankruptcy filing fees — Chapter 13
• Ala. Code § 6-10-11 — Exemptions in federal bankruptcy
• Cal. Civ. Proc. Code § 703.130 — Federal exemptions not authorized in California
• 735 ILCS 5/12-1201 — Bankruptcy exemption
• U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter: What can Bankruptcy do for you? What will it do to you?
• U.S. Bankr. Ct. D. Ariz., Instructions for Completing the Bankruptcy Petition, Schedules and Statements
• Bankr. S.D. Iowa official guidance — Instructions - Bankruptcy Forms for Individuals
• Bankr. D. Md. official page — Bankruptcy Checklist
• Pro Se Debtor Guide — U.S. Bankr. Ct. D.N.H., Pro Se Debtor's Guide
• W.D.N.C. LBR 9029-1
• U.S. Bankr. Ct. D. Alaska, The Forms Individuals and Married Couples Need to File Bankruptcy

Related

• Build your personalised roadmap
• Chapter 7
• Chapter 13
• Exemptions: what they protect
• The automatic stay
• Find your local bankruptcy court