If you’re thinking about filing for bankruptcy, you may be concerned about what might happen to your house during the process. How your home will be treated will depend on a few different things: 1) what chapter of bankruptcy you are filing, 2) whether you have equity in your home, 3) if you do have equity in your home, whether the laws of your state fully protect that equity, and 4) whether you desire to keep or surrender your home during the bankruptcy process.

To begin with, the laws of each state allow a debtor to “keep” his or her primary residence as long as the equity in that house can be claimed as exempt. “Exempt” means the state legislature has decided that debtors who file for bankruptcy should be able to keep certain assets, so long as the value of those assets falls within the limits set by the legislature. Each state allows a debtor to keep some portion of equity in their home, and each state’s exemptions vary. For example, in Nevada a debtor can protect up to $550,000 in equity in their home, but in Utah a debtor can only protect up to $30,000 in equity in their home. So, Debbie, a Utah resident, owns a home that has a fair market value of $200,000, and she still owes $180,000 on it. This means she has equity of $20,000 and she will be able to claim that equity as exempt in her bankruptcy, and keep her home. However, if she only owed $50,000 on her house, that would mean she had $150,000 in equity in it, and she would lose her home in a bankruptcy because the Utah equity exemption is too small to cover her equity. However, if Debbie had no equity in the house, such as if her house was upside-down and she owed more than the house was worth, she would definitely be able to keep her house.

The above “exemption” analysis will apply whether you file a Chapter 7 or a Chapter 13 bankruptcy. If your house has a lot of equity in it, you will likely have to surrender it in a bankruptcy unless your home’s equity falls below your state’s exemption. One thing a Chapter 13 bankruptcy offers that a Chapter 7 does not is assistance to debtors who have become tardy in making their mortgage payments. In this case, the debtor’s attorney can build the tardy mortgage arrearages into the debtor’s Chapter 13 plan payments. So long as the debtor can afford his monthly plan payments, the mortgage is essentially brought current through the Chapter 13 plan, and the debtor continues paying his mortgage payments as usual, without the threat of foreclosure constantly looming. A Chapter 7 does not offer any such benefit.

Potential debtors should note that, even if your home has a low enough equity to be exempt, if you are filing a Chapter 7 and are in default on your mortgage, your lender may elect to foreclose on you anyway. A Chapter 7 does not “fix” a delinquent mortgage situation like a Chapter 13 can, no matter what the equity situation looks like.

You will also have an option in your bankruptcy petition to declare whether or not you want to keep your house. For some, a bankruptcy is a good opportunity to rid themselves of a bad mortgage situation. One of the protections bankruptcy offers is that a debtor can absolve themselves of any present and future liability to a mortgage lender. In their bankruptcy, a debtor can simply declare that he is surrendering his home, and he can walk away from the mortgage debt, even if his home is underwater.

If you are concerned about your mortgage situation and you are considering filing for bankruptcy, you should consult an experienced bankruptcy attorney. They can help you understand the potential consequences a bankruptcy filing will have on your home.