For many homeowners facing financial distress, the biggest question isn’t just how to get out of debt—it’s whether filing for bankruptcy means losing their home.
The answer depends on several factors, including the type of bankruptcy, how much equity you have, and whether you’re current on your mortgage payments.
While bankruptcy is often viewed as a last resort, it can also be a legal tool for protecting certain assets, including, in some cases, your home.
How bankruptcy affects homeowners
To understand how bankruptcy will affect you, first it needs to be determined what kind you’d be filing.
Chapter 7 bankruptcy, often called “liquidation bankruptcy,” means that some of your property may be sold to help repay creditors. Whether you can keep your home depends on how much equity you have. If your home’s equity goes beyond the amount protected by your state’s homestead exemption, the bankruptcy trustee might require you to sell it to help pay off debts.
Chapter 13 bankruptcy, sometimes referred to as a “wage earner’s plan,” works differently. Rather than liquidating assets, it allows you to restructure your debts into a three- to five-year repayment plan. This often enables homeowners to catch up on missed mortgage payments and avoid foreclosure, provided they can keep up with both the repayment plan and ongoing mortgage obligations.
In both cases, courts generally treat mortgage debt as “secured debt,” meaning it’s backed by your property. Lenders retain the right to foreclose if payments fall behind, even during bankruptcy proceedings. However, bankruptcy’s automatic stay can temporarily pause foreclosure actions, offering homeowners valuable time to stabilize their finances.
State laws play a major role as well. Homestead exemptions vary widely, from as little as $10,000 in some states to unlimited protection in others. Understanding your state’s specific limits is critical before filing.
When you can keep your home after filing
You might still be able to keep your house during bankruptcy if you have little equity, are current on your mortgage, or qualify under your state’s exemption limits.
The key factor is whether your home has more value than what the law allows you to protect.
Each state sets its own exemption amount, which determines how much equity you can shield from creditors. If your equity falls below that limit, you typically can’t be forced to sell to satisfy the debt.
To use the homestead exemption for bankruptcy, you may need to have purchased your house a certain number of days before filing bankruptcy.
Let’s say your home is worth $300,000, and you still owe $275,000 on your mortgage. That means you have $25,000 in equity—the portion of the home you truly “own.” If your state’s homestead exemption covers $25,000 or more, all of your equity is protected. Because there’s no unprotected (nonexempt) value left for creditors, the bankruptcy trustee wouldn’t require you to sell the home.
Under Chapter 13 bankruptcy, homeowners who have some equity and a reliable income can often keep their house by catching up on missed payments over time.
For example, if you fell a few months behind on your mortgage after losing your job, Chapter 13 would let you include those missed payments in your repayment plan. You’d then pay them off gradually, along with your other debts, over three to five years, while continuing to make your regular mortgage payments going forward.
In some cases, filing for bankruptcy can help save a home from foreclosure. The automatic stay that takes effect immediately after filing temporarily halts foreclosure proceedings. Under Chapter 13, this can give homeowners time to negotiate new payment terms with their lender or bring their mortgage current through the court-approved plan.
When you’re likely to lose the house
Unfortunately, not every homeowner who files for bankruptcy will be able to keep their property. In many cases, the deciding factors are how much equity you have and whether you can stay current on payments.
If your home has substantial equity beyond your state’s homestead exemption limit, the bankruptcy trustee may move to sell it to pay off creditors under Chapter 7.
Similarly, if your mortgage payments are behind and you can’t demonstrate the ability to catch up under Chapter 13, foreclosure may still proceed once the bankruptcy case concludes.
What options exist if you’re going to lose the house?
Homeowners can choose to surrender or sell the home voluntarily to minimize financial strain and move toward a cleaner restart.
A short sale—selling the home for less than what’s owed with lender approval—can prevent foreclosure and reduce damage to your credit.
Alternatively, a reaffirmation agreement under Chapter 7 allows borrowers to keep the property by continuing to make payments, though this keeps the debt legally in place and should be approached cautiously.
In some cases, selling before filing for bankruptcy can make sense, particularly if you expect the home to be liquidated anyway. This allows you to control the timing and potentially use sale proceeds to pay down other debts or fund relocation expenses.
Because the rules vary significantly by state (and mistakes can have long-term consequences) it’s critical to consult a bankruptcy attorney before making any major decisions. A qualified lawyer can help you understand your local exemption laws, navigate lender negotiations, and explore options that best preserve your financial stability.
Life after bankruptcy: rebuilding while keeping your home
If you do keep your house through bankruptcy, your financial journey doesn’t end when the case closes; it begins a new chapter. Bankruptcy remains on your credit report for seven to 10 years, but homeowners can start rebuilding their credit much sooner.
Maintaining steady, on-time mortgage payments is one of the most effective ways to demonstrate renewed financial responsibility. Over time, this consistent record can help you qualify for refinancing, typically within two to four years, depending on the type of bankruptcy and lender requirements.
Homeowners should also focus on protecting and rebuilding equity. This might mean setting aside emergency savings for maintenance and property taxes or avoiding taking on new high-interest debt that could jeopardize stability. Using secured credit cards, monitoring your credit score, and keeping balances low can also accelerate recovery.
Ultimately, while bankruptcy can feel like a setback, it can also serve as a strategic reset. Many homeowners emerge from the process with a more sustainable financial foundation, and, in some cases, with their most important asset intact.