What Happens in Bankruptcy If I Own My Home Outright?

by Debbie Donner ; Updated July 27, 2017
If you own your home outright, it could still become property of the bankruptcy estate.

What happens in bankruptcy if you own your home outright depends on which type of bankruptcy protection you file for, the value of your home, the state in which you live and other factors surrounding your particular situation. State and federal bankruptcy laws, some of which can be fairly complicated, vary by state.

Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy protection typically means there are little to no assets that can be sold to repay creditors. Chapter 7 or liquidation bankruptcy involves liquidation or selling of the debtor’s assets that do have value, with the proceeds distributed to creditors. If you qualify to file for Chapter 7 (pass the means or income test), it is possible that most or all of your debts will be discharged (eliminated). You may lose your home in the process, even if you own it outright. Certain assets are exempt (excluded) from the bankruptcy estate, including all or part of the value in your home, depending on where you live.

Chapter 13 Bankruptcy

The primary purpose of bankruptcy is to allow you to get a fresh financial start. The Bankruptcy Code allows debtors to keep assets that are deemed necessary for the debtor’s day-to-day living and ability to get that fresh start. A Chapter 13 bankruptcy — also known as reorganization or wage — earner’s bankruptcy-allows you to keep all your assets by repaying your creditors over a three- to five-year period in accordance with a court-approved payment plan. You may want to consider filing Chapter 13 to keep your home, if you have the income to pay off some or all of your outstanding debts through the repayment plan.

Homestead Exemption

A homestead is any real property used as your primary residence and is therefore exempt from forced sale for payment of debts. Homestead exemption laws determine whether the total value of your home is exempted from the bankruptcy estate or whether you will be liable to your creditors for any non-exempt value in your home. It is also heavily dependent on your state’s laws. At BankruptcyAction.com there is a listing of homestead and other bankruptcy exemptions by state, as well as whether each state allows you to use only state exemptions or choose between state and federal.

Exemption Rules

What happens in bankruptcy if you own your home outright relies on determining how much of your property’s equity is exempt from the bankruptcy estate. Now is when it becomes beneficial to have an experienced bankruptcy lawyer advising you. Homestead exemption amounts can vary widely from state to state, ranging from no exemption (New Jersey) to $250,000 (Montana) to unlimited (Texas). Homestead exemptions are subject to two rules: you must use the exemptions for the state of your previous residence, if you have been in your current state less than two years; and regardless of your state’s allowance, you can exempt a maximum of $136,875 of your home’s equity if the property was obtained less than 40 months before filing for bankruptcy or if you have been convicted of certain criminal activities or violated securities laws.

About the Author

Based in California, Debbie Donner is a freelance online writer who primarily writes articles related to personal finance. Donner received a Mensa scholarship in 2006 while attending California State University, Fresno. She holds a Bachelor of Arts degree in liberal arts and a multiple-subject teaching credential.

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