Chapters

• The effects of bankruptcy on your house depend in large part on whether you file Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy involves a liquidation process, while Chapter 13 does not. In essence, this means that Chapter 7 poses some risk of loss for your home, while Chapter 13 does not. In liquidation under Chapter 7, the bankruptcy trustee sells off your nonexempt property, but the Trustee does not sell any of your property in a Chapter 13 bankruptcy.
  
  

Chapter 7 Exemptions

• A house is guaranteed safe under Chapter 13, but under Chapter 7 there is risk depending mostly on the homestead exemption available in your state. The first thing you need to discover before filing Chapter 7 bankruptcy is what the homestead exemption is where you live. The homestead exemption generally ranges from $10,000 up to $1 million depending upon the state where you live. If your exemption is large enough and your home equity is low enough, then your house might be safe even under Chapter 7.
  
  

Equity

• The key calculation in a Chapter 7 bankruptcy is to compare your home equity to the homestead exemption in your state. If your home equity exceeds the homestead exemption, then the trustee will likely sell your house and give you cash equal to the exemption amount. But, if your equity is less than the homestead exemption, then you will generally be allowed to keep your house as long as you remain current on your mortgage payments.
  
  To calculate equity you must estimate the fair market value of your home and then reduce that amount by the outstanding balance on your mortgage loan. This formula is somewhat imprecise because you never know for sure how much your home can sell for until you actually sell it, so you simply must make your best estimate of a possible selling price and use that amount as the estimated fair market value. You can contact your mortgage lender for an up-to-date mortgage payoff statement.
  
  

Close Calls

• It is not uncommon for a bankruptcy filer's home equity to be just a little bit higher than the homestead exemption amount. In that case, the bankruptcy trustee may not sell the house even though there is some equity available above the exemption amount. By the time the bankruptcy includes costs incurred in selling the home, it may not be worth it to actually sell the home.
  
  

Plan Ahead

• If you are a homeowner considering filing bankruptcy, you must begin to plan ahead to try to preserve your home. You can do this in a couple of ways. First, always consider Chapter 13 bankruptcy because your home is always safe in Chapter 13. Next, if you are going to file Chapter 7, consider taking out a second mortgage loan or home equity loan to reduce your equity in the house below the homestead exemption amount. If you need to go this route, it is best to consult with an experienced bankruptcy attorney because you could run into legal problems with fraud or preferential transfers.