What Happens to Your House If You File Bankruptcy?

If you file for bankruptcy, what happens to your house depends on three things: how much equity you have, how much of that equity the law protects, and whether you file under Chapter 7 or Chapter 13. If your equity is fully covered by the homestead exemption and you keep paying the mortgage, you keep the house. If your equity exceeds the exemption, a Chapter 7 trustee may sell it. If you’re behind on payments, Chapter 13 gives you a way to catch up and stay. In every scenario, the mortgage lien survives the case, so keeping the home long-term means continuing to pay.

Equity and the Homestead Exemption

Home equity is the difference between what your house is worth and what you still owe. A $300,000 home with a $225,000 mortgage carries $75,000 in equity. That equity is an asset creditors can potentially reach.

The homestead exemption shields a set dollar amount of that equity from the bankruptcy estate. The federal homestead exemption is $31,575 per person for cases filed on or after April 1, 2025. A married couple filing jointly can each claim it, for $63,150. Every state also has its own exemption. Some states let you pick between the federal and state amount; others require you to use the state figure. A handful of states protect unlimited equity.¹

If your equity fits inside the exemption, your home is fully protected. If it doesn’t, the overage is non-exempt equity, and that’s what the trustee focuses on. With $75,000 in equity and a $50,000 exemption, the $25,000 gap is where the risk lives.

The 1,215-Day Cap on Recently Bought Homes

If you acquired your home within 1,215 days before filing (roughly three and a half years), your homestead exemption cannot exceed $214,000, regardless of what your state otherwise allows.¹ The rule blocks people from buying an expensive home right before filing to hide cash. Past 1,215 days of ownership, your full state exemption applies.

Chapter 7: When a Trustee Can Sell

Chapter 7 usually wraps up in a few months. When you file, nearly everything you own becomes part of a bankruptcy estate,² and a court-appointed trustee reviews your assets to see whether anything can be sold to pay creditors.³

If your equity is fully exempt, the trustee has no reason to sell. The property is of no value to the estate, so it gets formally abandoned back to you.⁴ This is the most common outcome.

If you have non-exempt equity, the trustee can sell, but the math includes real costs: real estate commissions, closing fees, the trustee’s own compensation, and outstanding liens all come off the top. If what’s left over for creditors after those deductions is modest, the trustee often abandons the property anyway. That’s where the practical margin of safety sits for many homeowners with a small equity cushion above the exemption.

When a trustee does sell, the mortgage lender is paid first as the secured creditor. You then receive the cash value of your homestead exemption. Whatever remains goes to unsecured creditors under federal priority rules.⁵

Chapter 13: Keeping the House Through a Repayment Plan

Chapter 13 is built for people with income who need time. Instead of liquidating, you propose a repayment plan that runs three to five years.⁶ A trustee collects your payments and distributes them. You keep your property throughout.

Curing Missed Mortgage Payments

This is the reason Chapter 13 saves houses. The plan can cure a mortgage default by spreading your arrears across the plan’s duration while you resume normal monthly payments going forward.⁷ If you’re $12,000 behind and your plan lasts five years, roughly $200 a month of your plan payment goes toward that arrearage on top of your regular mortgage. By the time the plan ends, you’re current.

The Liquidation Test

Non-exempt equity still matters in Chapter 13. For the court to confirm your plan, unsecured creditors must receive at least as much as they would have gotten in a Chapter 7 sale.⁸ With $25,000 in non-exempt equity, your plan payments to unsecured creditors have to total at least $25,000 over its term. You keep the house, but you pay what a sale would have produced.

Stripping an Underwater Second Mortgage

Chapter 13 offers one tool Chapter 7 does not. Federal law generally blocks a bankruptcy plan from modifying a mortgage on your primary residence.⁷ But when a second mortgage or HELOC has zero security value because the first mortgage alone exceeds the home’s market value, courts have held the junior lien is effectively unsecured. The anti-modification rule doesn’t apply, and the second mortgage gets reclassified as unsecured debt, paid at whatever percentage the plan gives other unsecured creditors. When you complete the plan, the remaining balance is discharged, and you finish with only your first mortgage on the property.

The Automatic Stay Stops Foreclosure

The moment you file any bankruptcy, a federal injunction called the automatic stay takes effect and halts most collection activity, including an active foreclosure.⁹ A foreclosure sale scheduled for next week stops. This is often the immediate reason people file.

The stay isn’t permanent. Your lender can ask the court to lift it, and courts grant that relief when the lender’s interest isn’t adequately protected, or when you have no equity and the property isn’t needed for a reorganization.⁹ If you stop paying after filing with no realistic plan to catch up, the stay will be lifted within weeks.

Repeat filers get less protection. If your previous case was dismissed within the past year, the stay in the new case expires automatically after 30 days unless you convince the court to extend it. If two or more prior cases were dismissed in the past year, no automatic stay takes effect at all.⁹ Filing repeatedly to stall a foreclosure without a real reorganization plan is a pattern courts recognize and shut down.

The Mortgage Lien Survives Your Discharge

A discharge eliminates your personal liability on the mortgage. After the case closes, the lender can’t sue you for the balance or pursue a deficiency judgment. But the lender’s lien on the property survives untouched. Federal law states plainly that a discharge does not eliminate any lien on your property, and that because of the lien your creditor may still have the right to take the property.¹⁰ The Supreme Court has long held that liens pass through bankruptcy unaffected.¹¹

The practical result: you won’t owe the money, but the lender can still take the house if you stop paying. Foreclosure becomes the lender’s only remedy. They can’t reach your wages, bank account, or other assets for anything the foreclosure sale doesn’t cover.

Whether to Reaffirm the Mortgage

A reaffirmation agreement is a voluntary contract signed during the case that excludes a specific debt from the discharge.¹⁰ You agree to remain personally liable for the full mortgage balance. It must be filed with the court before discharge, and you have 60 days after filing to rescind.

The risk is real. If you reaffirm and later default, the lender can foreclose and sue you for any deficiency, just as if the bankruptcy never happened. Without reaffirmation, the worst outcome is foreclosure, and the lender can’t pursue you personally. Many bankruptcy attorneys advise against reaffirming a mortgage. In practice, most homeowners keep paying without signing anything, and the lender accepts the payments. Whether your ongoing payments show up on your credit report without a reaffirmation depends on the lender.

Which Chapter Fits Your Situation

You don’t always get to pick. Chapter 7 requires passing a means test if your income is above your state’s median. The test measures your income against allowed expenses; if too much is left, the court presumes the filing is abusive and pushes you toward Chapter 13.¹² The means test doesn’t apply if your debts are primarily business debts.

Chapter 13 requires regular income sufficient to fund a plan and has debt limits that are periodically adjusted. If you’re current on your mortgage and your equity is fully exempt, Chapter 7 wipes out unsecured debt without touching the house. If you’re behind, Chapter 13 is usually the path that saves it, because it’s the only chapter with a mechanism to cure the arrears while stopping foreclosure.

1
Office of the Law Revision Counsel. 11 USC 522 – Exemptions
2
Office of the Law Revision Counsel. 11 USC 541 – Property of the Estate
3
Office of the Law Revision Counsel. 11 USC 704 – Duties of Trustee
4
Office of the Law Revision Counsel. 11 USC 554 – Abandonment of Property of the Estate
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Office of the Law Revision Counsel. 11 USC 726 – Distribution of Property of the Estate
6
United States Courts. Chapter 13 – Bankruptcy Basics
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Office of the Law Revision Counsel. 11 USC 1322 – Contents of Plan
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Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan
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Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay
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Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge
11
Justia US Supreme Court. Dewsnup v Timm, 502 US 410 (1992)
12
United States Courts. Chapter 7 – Bankruptcy Basics