If you're struggling financially and considering bankruptcy, you're probably feeling overwhelmed with questions. Can I keep my home? Should I sell it before filing? What happens to my mortgage? The uncertainty can be paralyzing—but take a deep breath. You have options.
Bankruptcy doesn’t always mean losing your house, and it’s not the only way to get financial relief. The key is understanding how bankruptcy affects homeownership and what choices are available to you. Whether you're trying to stop foreclosure, protect your home, or explore alternatives, knowing your rights and options will help you move forward with confidence.
In this guide, we’ll break it all down in plain English so you can make the best decision for your future. You’ll learn:
What happens to your home when you file for bankruptcy
The key differences between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy for homeowners
Whether bankruptcy can stop foreclosure—and what to do if you’re at risk
If selling your home before filing is a smart move or a costly mistake
Let’s dive right in and take control of your next steps. You’re not alone in this—help is available, and solutions exist.
Understanding Bankruptcy & How It Affects Homeowners
Before diving into the practical steps, it’s essential to first understand bankruptcy and how it affects you as the homeowner.
It goes without saying, filing for bankruptcy is a huge financial decision. Just the name itself has a major negative ring to it. Many fear they’ll automatically lose their home, ruin their credit forever, or have no options left. But the reality is, bankruptcy is a legal tool designed to help individuals manage overwhelming debt, and for homeowners, it can provide both risks and opportunities.
In this section, we’ll break down what bankruptcy is, the two main types homeowners file for, common misconceptions, and how it impacts homeownership so you can make an informed decision.
What is Bankruptcy?
Bankruptcy is a legal process that helps individuals and businesses eliminate or restructure their debts when they can no longer afford to pay them. It’s governed by federal law and provides protection against creditors while allowing you to either discharge (eliminate) certain debts or create a manageable repayment plan.
For homeowners, bankruptcy can be a double-edged sword. It may temporarily stop foreclosure through an automatic stay, but depending on the type of bankruptcy filed, you may still need to sell your home or restructure your mortgage payments.
When it comes to bankruptcy, there are several types of bankruptcies out there. There's Chapter 7, Chapter 9, Chapter 11, Chapter 13, and so on. So how do you know which one to file for? The type of bankruptcy you file for will determine what happens to your home. For homeowners, the two main types of bankruptcy you should be aware of is Chapter 7 Bankruptcy and Chapter 11 Bankruptcy.
Chapter 7 Bankruptcy (Liquidation)
Chapter 7 is the most common type of bankruptcy. It is designed for those who have little to no disposable income and need a fresh start by wiping out most of their debts. However, it can result in the loss of your home if you have significant equity.
How Chapter 7 Affects Homeowners:
✅ Automatic Stay: Once you file, an automatic stay temporarily halts foreclosure and collections.
✅ Liquidation of Assets: A court-appointed trustee may sell non-exempt assets (including your home) to pay creditors.
✅ State Homestead Exemptions: Some states allow you to protect a certain amount of home equity from being liquidated.
✅ Secured Debt Still Exists: If you’re behind on mortgage payments, you may still lose your home after bankruptcy.
💡 Best for: Homeowners with little to no home equity who need to eliminate unsecured debt (credit cards, medical bills, personal loans).
Can You Keep Your Home?
- If your mortgage is current and your equity is within the state’s exemption limits, you might be able to keep your home.
- If you have too much equity or are behind on payments, the trustee may sell your home to pay debts.
Chapter 13 Bankruptcy (Repayment Plan)
Unlike Chapter 7, Chapter 13 is designed for those who have a steady income and want to restructure their debt while keeping their assets.
How Chapter 13 Affects Homeowners:
Stops Foreclosure: Filing immediately stops foreclosure and gives you a chance to catch up on missed mortgage payments. Debt Repayment Plan: You’ll create a 3 to 5-year repayment plan to pay back overdue mortgage payments and other debts. Keeps Your Home: If you follow the repayment plan, you can avoid foreclosure and keep your house. Doesn’t Discharge Mortgage Debt: Your mortgage remains intact—you still owe the balance.
Best for: Homeowners with a regular income who want to avoid foreclosure and catch up on missed payments.
Can You Keep Your Home?
- Yes, if you make all required payments under the repayment plan.
- No, if you fail to meet the repayment terms, foreclosure may proceed.
For a more detailed overview of Chapter 13 Bankruptcy, check out: Does Chapter 13 Bankruptcy Stop Foreclosure?
Chapter 7 vs. Chapter 13 Bankruptcy: What Homeowners Need to Know
What happens to Your Home in Bankruptcy?
Filing for bankruptcy is a major financial decision in someone's life. There are plenty of reasons why homeowners file for bankruptcies.
Perhaps you have recently lost a job and are going through a financial hardship. Or maybe you might have excessive credit card debt to pay for heavy medical expenses. Or perhaps you might be on the verge of losing your home in foreclosure and bankruptcy might be your way to avoid it?
Whatever that reason might be, the biggest concern in many homeowners' minds is their home. What happens to it? What happens to your home while your in bankruptcy?
Whether you can keep your home or must sell it depends on several factors, including your equity, the type of bankruptcy you file, and the specific protections available in your state. In this section, we’ll break down how bankruptcy impacts homeownership and what options are available to you.
Your Equity and Your Home: What are Your Options During Bankruptcy?
One of the biggest determining factors whether you can keep your home during bankruptcy is your Equity. As you might already know, your Equity is the difference between what your home is worth and what you owe on your mortgage. The amount of equity you have plays a crucial role in determining whether you can keep your home in bankruptcy.
EXAMPLE 1: You Have Equity in Your Home
Now let's say you do have equity on your home. Having equity can be both a benefit and a risk in bankruptcy. And it varies depending on which bankruptcy type you file for as a homeowner.
- Chapter 7 Bankruptcy (Liquidation): If you have substantial equity that exceeds your state’s homestead exemption (more on this below), the bankruptcy trustee may sell your home to pay off creditors.
- Chapter 13 Bankruptcy (Repayment Plan): Homeowners with equity can often keep their home as long as they create a repayment plan that covers mortgage arrears and other secured debts.
So... what are your options?
When you do have equity on your home, you do have several options that can help you out:
- Use the Homestead Exemption: Many states, including Nevada, offer homestead exemptions that protect a portion of your home’s equity from creditors.
- Convert to Chapter 13: If your home is at risk in a Chapter 7 case, converting to Chapter 13 may help you keep it.
- Negotiate with Creditors: In some cases, negotiating a settlement or loan modification can help protect your home during bankruptcy.
- Sell Before Bankruptcy: If you have significant equity, selling before filing can help you use the proceeds to settle debts without filing bankruptcy at all.
EXAMPLE 2: You Don't Have Equity in Your Home
Now, let's look at another scenario. Well what if you don't have equity in your home? What happens to your home when you file for bankruptcy in that scenario?
If you don't have equity on your home or if you owe more than what your home is worth (also known as being underwater on your mortgage), bankruptcy can actually serve as a tool to help you in these situations. Filing for bankruptcy can provide a way to eliminate or restructure your debt.
Let's look at your options.
- Lien Stripping (Chapter 13): If you have a second mortgage, Chapter 13 may allow you to remove it if your home’s value doesn’t cover the first mortgage. Lien Stripping is great for bankruptcy filers who are "upside down" on their homes, allowing debtors to remove junior liens (like second mortgages) on their homes if the property value is less than the amount owed on the first mortgage.
- Surrendering the Home: In Chapter 7, you can choose to walk away from the home and discharge the mortgage debt.
- Loan Modification: Some lenders may offer modified terms even after bankruptcy to help you keep your home, so be sure to ask!
The Homestead Exemption - How You Can Use it To Protect your Home
When it comes to protecting your home during bankruptcy, it is crucial to know the state specific laws to help your case. Each state has different laws regarding how much equity you can protect in bankruptcy. So be sure to familiarize yourself with your own state's law before you file for bankruptcy. A homestead law can vary significantly from state to state.
In Nevada, homeowners can protect up to $605,000 of home equity under the Nevada Homestead Exemption. This means if your home’s equity falls within this limit, creditors cannot force you to sell your home in bankruptcy.
Here's how you can use the Homestead Exemption Effectively:
- File a Homestead Declaration: In Nevada, homeowners must file this document with the county recorder to claim the exemption.
- Ensure Proper Bankruptcy Filing: If your home equity is under the limit, filing Chapter 7 may allow you to keep your home.
- Understand Federal vs. State Exemptions: Some states allow filers to choose between state and federal exemptions, but Nevada requires the use of state exemptions.
How Does Your Mortgage Lender React During Bankruptcy
We have covered several topics in which you are able to keep your home during a bankruptcy filing. However, one thing that needs to be addressed is how your lender fits in during this time. After all, they have a large part of what happens to your home - whether you keep it or lose it. It's super important to over communicate with your lender, and fully understand what happens from a bank's perspective. Whether you’re filing for Chapter 7 or Chapter 13, your lender’s reaction will depend on the details of your case, your payment status, and whether you want to keep or surrender your home.
Your lender plays a significant role in what happens to your home during bankruptcy. Understanding how your lender reacts during bankruptcy will help you navigate the process a little better.
Automatic Stay Protection: When you file for bankruptcy, the automatic stay immediately stops foreclosure proceedings, giving you temporary relief from collection efforts. However, this doesn’t erase your mortgage debt—it simply pauses enforcement actions while the bankruptcy case is active.
Chapter 7 Lenders May Still Foreclose: If you’re behind on mortgage payments and file for Chapter 7 bankruptcy, your lender can request a motion to lift the automatic stay, allowing them to continue foreclosure. Unless you’re able to catch up on payments or negotiate a reaffirmation agreement, lenders will typically proceed with foreclosure if you can’t afford to keep the home.
Chapter 13 Provides a Repayment Plan: Unlike Chapter 7, Chapter 13 allows you to repay missed mortgage payments through a structured repayment plan, typically over 3 to 5 years. Lenders generally prefer this option because it increases their chances of recovering the full loan amount while allowing homeowners to stay in their homes. However, staying on top of payments is crucial—if you miss payments during the plan, the lender can still move forward with foreclosure.
Even though bankruptcy affects how lenders can take action, it doesn’t erase their right to collect on the mortgage. If keeping your home is your goal, maintaining communication with your lender and staying informed about your options is key.
What Happens If You Stop Making Mortgage Payments?
If you stop making payments on your mortgage, the outcome depends on whether you filed for bankruptcy and the type you chose:
- Before Bankruptcy: Falling behind on payments can lead to foreclosure, damaging your credit and resulting in the loss of your home.
- During Chapter 7: If you’re behind and cannot exempt your home, the lender will likely proceed with foreclosure once the bankruptcy case ends.
- During Chapter 13: As long as you stick to the repayment plan, your home is protected. Missing payments may lead to case dismissal, putting you back at risk of foreclosure.
Understanding How Bankruptcy Can Help Avoid Foreclosure
There are several reasons why a homeowner might want to file for bankruptcy. But probably one of the most common reason homeowners end up pulling the trigger on it is the notion that it can stop foreclosure. So let's answer the question - will filing for bankruptcy stop foreclosure?
The answer depends on the type of bankruptcy you file and your specific situation - so lets dive right in.
The Automatic Stay Explained - How Bankruptcy Can Stop Foreclosure
One of the most powerful protections bankruptcy offers is the automatic stay, which prevents creditors—including your mortgage lender—from taking collection actions. This means that as soon as you file for bankruptcy, foreclosure is paused, along with any scheduled auctions or legal proceedings against your home.
When you file for bankruptcy—whether Chapter 7 or Chapter 13—an automatic stay is immediately issued by the court. This stay halts all collection efforts, including foreclosure, wage garnishments, and creditor harassment. It provides temporary relief, allowing homeowners time to evaluate their next steps. However, it’s not a permanent solution, and its impact varies based on the bankruptcy type.
Will Chapter 7 Bankruptcy Stop Foreclosure?
If you file for Chapter 7 bankruptcy, the foreclosure process is temporarily halted, but the protection is often short-lived.
- Chapter 7 discharges unsecured debts but does not eliminate mortgage debt if you want to keep your home.
- If you’re behind on mortgage payments, lenders can file a motion to lift the automatic stay, allowing them to proceed with foreclosure.
- Ultimately, if you can’t catch up on missed payments or negotiate a loan modification, the lender may still foreclose on your home after the bankruptcy process is completed.
For homeowners who want to keep their home, Chapter 7 alone is rarely a solution unless they can quickly bring their mortgage current or qualify for a loan modification.
Will Chapter 13 Bankruptcy Stop Foreclosure?
Chapter 13 bankruptcy is often the better option for stopping foreclosure because it allows homeowners to repay missed mortgage payments over time while keeping their home.
- Under Chapter 13, you set up a court-approved repayment plan (usually over 3-5 years) to catch up on past-due mortgage payments.
- As long as you stay current on your repayment plan and continue making your mortgage payments, your lender cannot foreclose.
- This option provides a structured way to get back on track without losing your home.
Can a Lender Still Foreclose During Bankruptcy?
While bankruptcy does temporarily stop foreclosure, lenders can file a motion to lift the automatic stay if they believe the homeowner has no realistic way to bring payments current. If granted, the foreclosure process can resume even while you are in bankruptcy.
While bankruptcy can delay or prevent foreclosure, it’s not always a long-term fix. Chapter 13 offers more protection for homeowners wanting to keep their property, whereas Chapter 7 may only provide temporary relief before the lender resumes foreclosure proceedings. If stopping foreclosure is your goal, you may also want to explore loan modifications, short sales, or selling your home before foreclosure as alternative solutions.
Is Filing Bankruptcy to Avoid Foreclosure the Right Choice For You?
If you’ve fallen behind on mortgage payments, the fear of foreclosure can be overwhelming. Bankruptcy is often seen as a way to stop the process, but is it truly the best option? While filing for bankruptcy can provide temporary relief and even a path to saving your home, it’s not always the right solution. In many cases, alternative options may provide a better outcome with less damage to your financial future.
The truth is bankruptcy is not a one-size-fits-all solution. But it is a tool in your tool belt. However, it should only be seen as a last resort.
Bankruptcy can be a viable strategy in certain situations, particularly when homeowners have the means to regain control of their finances. You may want to consider bankruptcy if:
✅ You’ve missed multiple payments but want to catch up. If you have fallen behind due to temporary financial hardship but can afford to resume payments, bankruptcy—especially Chapter 13—can give you time to catch up.
✅ You have a steady income and can afford a repayment plan. Chapter 13 allows homeowners to create a structured repayment plan, spreading missed payments over several years to make them more manageable.
✅ You want to avoid the long-term impact of foreclosure on your credit. A foreclosure can stay on your credit report for up to seven years, making it difficult to secure loans or new housing. While bankruptcy also impacts credit, it may provide more control over your financial situation.
✅ You have other debts that bankruptcy can eliminate. If high-interest debts like credit cards or medical bills are making it impossible to keep up with your mortgage, filing for bankruptcy may free up the cash flow you need to maintain homeownership.
However, bankruptcy isn’t a magic fix—it comes with consequences. It should be considered only after all other alternatives have been explored.
While bankruptcy can stop foreclosure temporarily through the automatic stay, it doesn’t guarantee that you’ll keep your home. Lenders can request to lift the stay, and if you can’t afford a repayment plan, you could still face foreclosure down the road.
Plus bankruptcy remains on your credit report for 7–10 years, potentially affecting your ability to secure loans, rent a home, or even find employment in some cases. That’s why it’s essential to consider alternatives before filing for bankruptcy.
Top 5 Alternatives to Bankruptcy to Avoid Foreclosure
Filing for bankruptcy can be a last resort for homeowners facing financial distress, but it’s not the only option. Depending on your situation, you may have several alternatives to bankruptcy that can help you keep your home or minimize financial damage. Let’s explore different strategies to protect your home and avoid bankruptcy.
Loan Modification – Renegotiating your mortgage terms with your lender can lower your monthly payments and help you stay in your home.
Forbearance Agreement – If your hardship is temporary, a forbearance may allow you to pause or reduce payments for a set period while you regain financial stability.
Short Sale – If your home is worth less than what you owe, a short sale can help you avoid foreclosure by selling the home with lender approval.
Deed in Lieu of Foreclosure – Voluntarily transferring ownership back to the lender can be a less damaging alternative to foreclosure.
Selling the Home Before Bankruptcy or Foreclosure – If your home has equity, selling it before financial trouble escalates can help you pay off your debts and protect your credit.
While bankruptcy is an option, it should only be considered after all other solutions have been exhausted. If you’re struggling with mortgage payments, evaluating alternatives first can help you make the best financial decision for your future.
Every homeowner’s financial situation is different. If you’re facing foreclosure, exploring these alternatives to bankruptcy can help you find the best path forward. Whether through loan modification, forbearance, selling your home, or negotiating with your lender, there are options available to help you regain control of your finances and avoid the long-term consequences of bankruptcy.
Selling Your Home During Bankruptcy
Bankruptcy is stressful enough—throw in the need to sell your home, and the situation can feel overwhelming. You may be wondering: Can I even sell my home while in bankruptcy? Will the court or my lender stop me? What happens to the money if I do sell?
The good news is that selling your home is possible during bankruptcy, but it comes with legal hurdles and court approvals. Whether you're in Chapter 7 or Chapter 13, understanding how the process works can help you make the best financial decision—whether that means selling to free yourself from debt or keeping your home under better terms.
Can You Sell Your Home During Bankruptcy?
If you have already filed for bankruptcy, chances are you've already exhausted all your options. But what if you do decide that selling you home is the right move for you after all? Can you sell your home during bankruptcy - or is it too late?
It's possible. But - it does come with legal and financial considerations. Selling you home during a bankruptcy is very possible and is dependent on each person's specific situation on what type of bankruptcy was filed.
- Chapter 7 (Liquidation Bankruptcy): Since Chapter 7 involves selling assets to pay off creditors, the bankruptcy trustee controls any property that is not protected by exemptions. If your home has non-exempt equity, the trustee may sell it to repay creditors. If your home is fully protected under the homestead exemption, you may be able to sell it with court approval.
- Chapter 13 (Repayment Plan Bankruptcy): In a Chapter 13 bankruptcy, you remain in control of your assets, but any sale must be approved by the court and fit within your repayment plan. Selling your home may allow you to pay off debts faster, but it requires careful planning and legal approval.
How Selling Impacts Your Bankruptcy Case
If you're wondering how selling impacts your bankruptcy case, there are a few things you should consider before you pull the trigger.
- Can selling help settle debts?
If your home has equity, selling could provide enough funds to pay off creditors and potentially complete your bankruptcy case sooner. However, if you sell for less than what you owe (a short sale), you may still need court approval to discharge any remaining debt. - Will it protect your credit?
Selling your home before foreclosure or bankruptcy can help minimize damage to your credit score. If your bankruptcy is already filed, the impact on your credit is unavoidable, but selling proactively may help you start rebuilding credit sooner. - Are there restrictions on how you use the proceeds?
In Chapter 7, any proceeds beyond the homestead exemption go toward paying creditors. In Chapter 13, the proceeds may need to be applied toward your repayment plan, depending on your agreement with the court.
Traditional Sale vs Selling to an Investor vs Short Sale
After you have decided that selling is the right option for you, how do you go on about it? When selling during bankruptcy, consider your options carefully. Choosing the right method depends on your bankruptcy type, home equity, and urgency to sell. Let's look at some comparisons below:
If you need to sell quickly, a cash buyer may be your best option to close the deal fast and avoid foreclosure delays. However, if you have time and equity, a traditional listing could maximize your sale price.
Selling your home during bankruptcy is possible, but it requires court approval, strategic timing, and careful planning. Whether you choose a traditional sale, investor sale, or short sale, understanding your options will help you make an informed decision that aligns with your financial goals. If you're considering selling, consult your attorney and explore all potential alternatives before making a final move.
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Frequently Asked Questions
Will I Lose My Home If I File for Bankruptcy?
It depends on the type of bankruptcy you file and your home equity. Chapter 7 bankruptcy may require you to sell your home if it’s not protected by exemptions, while Chapter 13 allows you to keep it as long as you maintain payments under your repayment plan.
Should I file bankruptcy or try to sell my house first?
If you have equity and can sell your home for a profit, selling before bankruptcy might be better. However, if you’re facing foreclosure, bankruptcy might provide a way to delay the process and negotiate repayment options.
Will bankruptcy erase all my debts, or will I still owe money?
Chapter 7 is typically cheaper in the short term since there is no repayment plan, but you risk losing assets. Chapter 13 has ongoing payments but allows you to retain more property.
Is it cheaper to file Chapter 7 or Chapter 13?
Bankruptcy can discharge many types of unsecured debt, such as credit card balances and medical bills. However, some debts, like student loans, child support, and most tax debts, typically cannot be erased.
Do I make too much money to qualify for bankruptcy?
If your income is above the median level in your state, you may not qualify for Chapter 7 and may need to file Chapter 13, which requires a repayment plan.
Will bankruptcy destroy my credit forever?
No, but it will significantly impact your credit score. Chapter 7 remains on your credit report for 10 years, while Chapter 13 stays for 7 years. With responsible financial habits, you can rebuild your credit over time.
Can I ever buy a home again after bankruptcy?
Yes! Many lenders offer mortgages to individuals 2-4 years after a bankruptcy discharge, provided they demonstrate financial stability.
How does bankruptcy compare to foreclosure for my credit score?
Great question. A lot of homeowners often compare bankruptcy vs foreclosure when in a financial bind, and wonder what might be worse for your credit. Both have severe consequences, but foreclosure may be worse because it stays on your record longer and signals to lenders that you defaulted on a home loan.
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FINAL THOUGHTS
Filing for bankruptcy as a homeowner is a major decision—one that impacts your financial future, your home, and your peace of mind. But as overwhelming as it may seem, you do have options.
Whether you're considering Chapter 7 or Chapter 13 bankruptcy, exploring loan modifications or short sales, or weighing foreclosure vs. bankruptcy, the key is to make an informed choice that aligns with your financial goals. Bankruptcy may offer relief, but it’s often a last resort—if you can avoid it by selling your home, negotiating with your lender, or finding another alternative, you may come out in a stronger financial position.
Before making any decisions, take the time to evaluate and ask yourself:
✔ Can you afford your mortgage, or are payments unsustainable?
✔ Will bankruptcy help you catch up, or is selling a better solution?
✔ Are there alternatives that can protect your home and credit?
No matter your situation, seeking professional guidance from a bankruptcy attorney, financial advisor, or real estate expert can help you navigate your next steps with confidence. By understanding your rights and options, you can take control of your financial future and make the best decision for yourself and your family.
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Contact us today for a no-obligation consultation and let’s explore how we can help you find the best path forward.
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