One of most people’s concerns is being able to keep their home. It’s important to know that a Chapter 7 bankruptcy DOES NOT MEAN YOU WILL AUTOMATICALLY BE ABLE TO KEEP YOUR HOME. It does not stop a foreclosure. You need to keep paying your mortgage on time during the bankruptcy proceedings. Keeping your house in a Chapter 7 bankruptcy is possible under something called “the homestead exemption.”

Under Chapter 7 bankruptcy you are allowed to keep a portion of your home’s value – otherwise known as a homestead exemption. The difference between what your house is worth and how much you owe on it to any lenders is your equity (the money you have built up in your home). Under a Chapter 7 bankruptcy, the court appointed trustee will sell your home and the proceeds will be used to first pay off your home lender(s) and then any remaining equity will be used to pay off other creditors (i.e. car loan lenders, credit card companies, etc.).

Before automatically selling your home a bankruptcy trustee will review your home’s worth, the equity you have built up in your home and your federal or state homestead exemption. The federal homestead exemption is $15,000. Some states allow homestead exemptions for as little as $5,000 and some up to $100,000. If your homestead exemption equals the amount of money that would otherwise be owed to your unsecured creditors the bankruptcy trustee will not sell your home.

Let’s look at an example:

Let’s say that you have a home worth $150,000 and have a state homestead exemption of $30,000. If you have an outstanding mortgage loan of $120,000, your bankruptcy trustee won’t sell your home because $150,000 - $120,000 = $30,000, which is the same amount as the homestead exemption.

So knowing how much money you owe on your mortgage loan and what your state’s homestead exemption is will determine whether or not you will lose your home in bankruptcy.

It’s important to check your state and local bankruptcy laws because homestead exemptions vary widely.