You can file Chapter 7 with equity in your home, and in many cases you can keep the house. The outcome turns on one calculation: whether your homestead exemption covers all of your equity. If it does, the trustee has no reason to sell. If a slice of equity sits outside that protection, the house may be at risk.
The Calculation That Decides Everything
Start with your equity. Take the current market value of your home and subtract every mortgage, home equity loan, and lien against it, including tax and mechanic’s liens. If your home would sell for $300,000 and you owe $220,000, your equity is $80,000. That figure is an asset in your bankruptcy case.
Chapter 7 is a liquidation. A court-appointed trustee reviews what you own, sells anything that isn’t legally protected, and distributes the proceeds to unsecured creditors.1United States Courts. Chapter 7 Bankruptcy Basics Your home is on the list of assets the trustee reviews.2Office of the Law Revision Counsel. 11 U.S. Code 704 – Duties of Trustee Whether the trustee acts depends on the next step: subtracting your homestead exemption from your equity. If the result is zero or negative, your equity is fully protected. If it’s positive, that leftover amount is your non-exempt equity, and it’s potentially available to the trustee.
Say your home is worth $350,000, you owe $250,000, and your homestead exemption is $75,000. Your equity is $100,000; your non-exempt equity is $25,000. That $25,000 is what the trustee evaluates.
Getting the value right matters. A professional appraisal costs a few hundred dollars but gives you a defensible number. Overestimating by even $15,000 could be the difference between keeping the home and losing it. Comparable recent sales in your neighborhood are a reasonable secondary check, though the trustee may commission an appraisal if they doubt your figure.
How the Homestead Exemption Protects Your Equity
A homestead exemption shields a set dollar amount of equity in your primary residence from the trustee. Vacation homes, rentals, and investment property don’t qualify.
State Versus Federal
Every state has its own homestead exemption, and the amounts vary widely. Some states protect tens of thousands; a few protect unlimited equity. Federal bankruptcy law also has its own exemption list, with a homestead exemption of $31,575.3Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
You don’t always get to pick. A majority of states have opted out of the federal exemptions, meaning residents must use the state list.3Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions In states that allow the choice, you pick one system and use it in full. You cannot combine the homestead exemption from one list with other exemptions from the other.
Doubling for Joint Filers
When a married couple files jointly, federal exemption amounts double. A couple using the federal list can protect up to $63,150 of home equity.3Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions Many states allow similar doubling, though the rules vary. Both spouses generally need to be on title.
The Wildcard
Under the federal system, a wildcard exemption protects an additional $1,675 of equity in any property. More useful for homeowners: up to $15,800 of your unused homestead exemption can be redirected through the wildcard.3Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions If your home equity is $20,000 and the $31,575 homestead exemption already covers it, the unused portion can protect other assets like a car or bank account. If your home equity slightly exceeds the homestead limit, you can apply the wildcard to close the gap.
Residency Rules and the 1,215-Day Cap
Two federal rules limit exemption shopping and catch people off guard.
To use a particular state’s exemptions, you must have lived there for at least 730 days (two years) before filing. If you moved more recently, you’ll generally use the exemptions from the state where you lived during the 180 days before that 730-day window. If that leaves you eligible for no state’s exemptions at all, you can fall back on the federal list.3Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
If you acquired your home within 1,215 days (roughly 40 months) before filing, your homestead exemption is capped at $214,000, regardless of what state law would otherwise allow.4Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases This rule prevents people from buying a home in a generous-exemption state right before filing. The cap doesn’t apply to equity rolled over from a prior home in the same state, so long-time residents who recently upgraded usually aren’t affected.
What the Trustee Does With Non-Exempt Equity
Non-exempt equity doesn’t automatically mean the trustee sells. Before acting, the trustee runs the numbers: sale price minus the mortgage payoff, minus real estate commissions and closing costs, minus their statutory fee, minus the cash payout of your homestead exemption to you. Whatever remains is what unsecured creditors would actually receive.
If your non-exempt equity is only a few thousand dollars, that math rarely justifies selling a house. In those cases the trustee will abandon the property, formally declaring it of inconsequential value to the estate.5Office of the Law Revision Counsel. 11 U.S. Code 554 – Abandonment of Property of the Estate Once abandoned, the home stays yours as long as you keep paying the mortgage.
When the non-exempt equity is substantial, the trustee will sell. Proceeds go first to the mortgage holder and other lienholders. You receive a cash payment equal to your exempt amount. Sale costs and the trustee’s commission come out next. Whatever’s left goes to unsecured creditors. Where local trustees draw the line between abandonment and sale varies, and experienced bankruptcy attorneys in your area will know the practical threshold.
Keeping Current on the Mortgage
Protecting your equity with an exemption is only half the job. You also have to keep paying the mortgage. Chapter 7 wipes out your personal liability on debts, but it does not remove the lender’s lien on your home. If you stop paying, the lender can foreclose.
The Automatic Stay
The moment you file, an automatic stay halts all collection activity, including any pending foreclosure.6Office of the Law Revision Counsel. 11 U.S. Code 362 – Automatic Stay This is breathing room, not a permanent fix. If you’re behind on payments, the lender can ask the court to lift the stay and resume foreclosure.
Reaffirmation Agreements
Your mortgage lender may ask you to sign a reaffirmation agreement. This is a new contract in which you agree to remain personally liable for the mortgage debt despite the discharge.7Office of the Law Revision Counsel. 11 U.S. Code 524 – Effect of Discharge Think carefully before signing. If you reaffirm and later default, the lender can foreclose and then sue you for any deficiency balance. If you don’t reaffirm, your personal liability is discharged and the lien survives; the lender can still foreclose if you stop paying but generally cannot pursue you for a deficiency.
Many homeowners choose not to reaffirm and simply keep making payments. A lender has little incentive to foreclose on a borrower who pays on time, and not reaffirming preserves one of bankruptcy’s core protections.
Stripping Judgment Liens That Cut Into Your Exemption
If a creditor won a lawsuit against you before your bankruptcy, a judgment lien may have attached to your home. That lien reduces your equity on paper and can push more of your equity outside the exemption. Bankruptcy law lets you strip away judicial liens that impair your homestead exemption.3Office of the Law Revision Counsel. 11 U.S. Code 522 – Exemptions
You file a motion asking the court to avoid the lien. The court adds up all liens plus your exemption, then compares that total against the property’s value. If the combined figure exceeds the value, the judgment lien impairs your exemption and can be reduced or eliminated. This can work even when you’re underwater on your mortgage. Tax liens and purchase-money mortgages cannot be avoided this way. The remedy targets unsecured creditors who locked in a judgment lien before you filed.
When Chapter 13 Is the Better Choice
If your non-exempt equity is large enough that the trustee would sell, Chapter 13 is usually the better path. Chapter 13 is a reorganization: instead of liquidating assets, you propose a repayment plan lasting three to five years, and you keep your property throughout.8United States Courts. Chapter 13 Bankruptcy Basics
The tradeoff: your plan must satisfy the best-interest-of-creditors test. Unsecured creditors have to receive at least as much through the plan as they would have gotten in a Chapter 7 liquidation.9Office of the Law Revision Counsel. 11 U.S. Code 1325 – Confirmation of Plan With $40,000 in non-exempt equity, your plan payments to unsecured creditors need to total at least $40,000 over the plan’s life. That’s a real monthly cost, but you pay it over years rather than surrendering the house.
Chapter 13 has another advantage Chapter 7 doesn’t: it lets you catch up on missed mortgage payments through the plan. If you’re already behind, Chapter 7 won’t fix that. Chapter 13 can.
Other Requirements to File Chapter 7
Equity isn’t the only hurdle. You have to pass the means test: if your household income exceeds the median for your state, the court presumes filing Chapter 7 would be an abuse of the system, and you must rebut that presumption by showing allowable expenses leave little disposable income.10Office of the Law Revision Counsel. 11 U.S. Code 707 – Dismissal of a Case or Conversion to a Case Under Chapter 11 or 13 You also have to complete a credit counseling course from an approved agency within 180 days before filing, or the case can be dismissed.11U.S. Department of Justice. Credit Counseling and Debtor Education Information Failing either requirement can push you toward Chapter 13 regardless of what your equity looks like.