If your home builder just filed for bankruptcy, act fast on four fronts: file a proof of claim with the bankruptcy court before the deadline, call your construction lender before you miss a payment, locate any third-party structural warranty and contact the insurer directly, and gather every lien waiver you have to protect the property from unpaid subcontractors. Knowing what to do if your home builder goes bankrupt comes down to those first weeks, because the automatic stay under Section 362 of the Bankruptcy Code bars you from suing, collecting, or even calling the builder to demand your deposit back the moment the case is filed.1Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay Everything from here runs through the court.
Figure Out Who Owns the Land
This one fact reshapes every option you have, and most buyers overlook it.
If you own the lot and hired the builder under a construction contract to build on your land, the partially completed structure is your property. It does not become part of the bankruptcy estate, because the builder never owned it. You lose whatever payments haven’t yet been converted into completed work, but the structure and the land remain yours, and you can hire a new contractor to finish.
If the builder owns the land and you signed a purchase agreement for a home in the builder’s development, both the lot and the partial structure are assets of the bankruptcy estate. The trustee controls access. Your purchase contract becomes an executory contract that the trustee can accept or reject based on what helps the other creditors, and you may not be able to set foot on the property while the case is pending.
What Happens to Your Deposit and Contract
Under Section 365, the trustee can either assume your purchase contract or reject it.2Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases The choice is purely economic. If your contract price sits well above current market value, the trustee may assume it and arrange for completion, because selling the finished home to you generates more money for creditors. If the contract is at or below market, expect rejection.
Rejection is treated as a breach of contract occurring immediately before the filing date.2Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases That breach turns you into an unsecured creditor for your damages: the lost deposit, the price increase you’ll face hiring someone else, and any other provable financial harm. Unsecured creditors sit near the bottom of the payment order and historically recover pennies on the dollar, if anything.
Where Your Deposit Was Held
Recovery often turns on one question: did the deposit sit in a real third-party escrow account, or did the builder pocket it? Money held in a genuine segregated escrow account with an independent agent is generally not part of the bankruptcy estate and can be returned to you. Courts look at who controlled the account, who funded it, and whether it was set up as a true escrow rather than another account in the builder’s name.
If the builder commingled your deposit with operating funds, that money joins the general pool available to all creditors. Consumer deposits do get a limited priority under Section 507(a)(7), currently capped at $3,800 per individual.3Office of the Law Revision Counsel. 11 US Code 507 – Priorities Priority means you get paid ahead of general unsecured creditors for that first $3,800, but behind secured creditors, administrative expenses, and employee wage claims. On a $30,000 or $50,000 deposit, it barely registers.
File a Proof of Claim Before the Deadline
You have no chance of recovering money from the bankruptcy unless you file a proof of claim with the court. In Chapter 7 cases, the deadline is 70 days after the order for relief in voluntary cases and 90 days in involuntary cases.4Legal Information Institute. Federal Rules of Bankruptcy Procedure Rule 3002 – Filing Proof of Claim or Interest In Chapter 11 cases, the court sets its own bar date and announces it in the case notice.5Legal Information Institute. Federal Rules of Bankruptcy Procedure Rule 3003 – Filing Proof of Claim or Equity Interest Miss the deadline and your claim is effectively gone.
Attach everything. The purchase agreement and any addenda. Receipts for every payment. Bank records showing the transfers. Written communications about construction progress. The more documentation you provide, the harder it is for the trustee to dispute the amount. If you aren’t sure whether you qualify as a secured or unsecured creditor, state both positions and let the court sort it out. A bankruptcy attorney can help you frame the claim to maximize recovery.
Call Your Construction Lender Right Away
A construction loan is between you and your lender, not between the builder and the lender. The builder’s bankruptcy does not erase your obligation to repay. You still owe whatever has been drawn, and the lender still holds a lien on your property.
Contact the lender immediately. Construction lenders see builder failures more often than most buyers realize, and most will work with you rather than call the loan. The typical response is to freeze further draws, order an independent inspection of completed work, help you bring in a new contractor, and update the draw schedule for the new arrangement. If the remaining loan balance won’t cover completion with a new contractor, and it usually won’t, you may need to negotiate additional financing.
Do not simply stop paying while you figure things out. A construction loan default can trigger foreclosure on the partially built property, and you’d lose the home and every dollar already invested.
Protect the House From Subcontractor Liens
This is where builder bankruptcies get painful. When a builder collapses, the company often hasn’t paid its subcontractors and material suppliers for work already completed on your property. In most states, those subcontractors can file a mechanics’ lien against your home for the unpaid amounts, even though you already paid the builder in full. You can end up paying twice for the same work.
Mechanics’ lien laws protect anyone who supplied labor or materials to improve real property, and the claim runs with the property itself, not with the builder’s business. Filing deadlines vary by state but commonly fall between 60 and 120 days after work stops. If a lien is filed and you don’t resolve it, the lienholder can eventually force a sale of your property to collect.
Your defense is lien waivers. Every progress payment you released should have generated signed waivers from subcontractors and major material suppliers confirming payment for that phase. Pull those waivers now and organize them by draw. Any phase covered by valid waivers is protected. Any phase without waivers, or work performed after your last waiver, is exposed, and you may need to negotiate directly with those subcontractors or pay off recorded liens to keep the property clean.
Finish the House With a New Contractor
If you own the land, hiring a new contractor is your most direct path to a completed home. Expect it to cost more than you’d think. Completion contractors have to inspect what the previous builder did, identify code violations and substandard work, and correct problems before they can move forward. They also know you have limited leverage. Budgeting 20 to 40 percent above the remaining original contract price is realistic.
Start with an independent inspection by a licensed home inspector or structural engineer who has no relationship with any contractor bidding on the completion work. That inspection tells you what’s been done correctly, what needs to be torn out, and what remains. Then collect two or three bids from licensed, bonded contractors, and check references, financial stability, and complaint history with your state licensing board. If you have a construction loan, the lender will need to approve the new contractor and the revised scope of work before releasing further draws.
If the builder owned the land and the trustee rejects your contract, your options narrow. You can bid on the property if the trustee sells it, negotiate with whatever entity picks up the builder’s projects, or walk away and rely on your proof of claim for the deposit and damages. None of those paths move quickly.
Warranties and Outside Sources of Recovery
If you already closed on a completed home before the bankruptcy, the builder’s own warranty is essentially worthless. In a Chapter 7 liquidation the company ceases to exist. Even in Chapter 11, reorganized companies routinely shed pre-bankruptcy warranty obligations under the plan.
Third-Party Structural Warranty
Your real protection is a third-party structural warranty, which the builder should have purchased from an independent insurer and transferred to you at closing. These policies typically cover workmanship and materials for one year, mechanical systems like plumbing, electrical, and HVAC for two years, and major structural defects for ten years. Because the policy is a separate insurance contract with an independent company, the builder’s bankruptcy doesn’t affect coverage. Claims go straight to the warranty insurer.
Find your warranty documents and call the provider as soon as you learn about the bankruptcy. Get clear on coverage limits, exclusions, and the claim inspection process. If you can’t find the paperwork, check your closing documents or the title company that handled the closing.
Surety Bonds and State Recovery Funds
Many states require licensed builders to post a surety bond or contribute to a state-run recovery fund that reimburses consumers for financial losses caused by licensed contractors. Bond amounts and fund limits vary widely by state, and they’re modest relative to what a home costs, but they offer recovery that doesn’t depend on the bankruptcy proceeding.
A claim with your state’s contractor licensing board is separate from the bankruptcy case. Some recovery funds require you to first obtain a court judgment or exhaust other legal remedies before they’ll pay. Contact the licensing board early, because these claims carry their own statutes of limitations.
Tax Treatment of the Loss
Lost deposits and other financial losses from a builder bankruptcy are generally not deductible on your federal tax return as casualty or theft losses. Since 2018, individual casualty and theft losses on personal-use property are deductible only if they result from a federally declared disaster.6Internal Revenue Service. Publication 547 (2025), Casualties, Disasters, and Thefts A builder going bankrupt doesn’t qualify.
There is a narrow exception if the builder’s conduct amounted to actual theft under your state’s criminal law. If the builder took your money with no intention of completing the work, you may be able to claim a theft loss deduction under Section 165 of the Internal Revenue Code.7Office of the Law Revision Counsel. 26 US Code 165 – Losses The loss has to stem from conduct classified as theft under state law, you must have no reasonable prospect of recovering the funds, and the loss must arise from a transaction entered into for profit.6Internal Revenue Service. Publication 547 (2025), Casualties, Disasters, and Thefts A tax professional can tell you whether your situation clears those hurdles. For most builder bankruptcies driven by financial mismanagement rather than outright fraud, no deduction is available.