Valuation

• The valuation of your home plays a large role in its disposition after bankruptcy. If you have significant equity in your home, the bankruptcy trustee will most likely try to sell your house and distribute the proceeds to your creditors. If you do not have equity in your house but are behind on payments, your lenders may try to foreclose on the house outside of the bankruptcy. In either case, you will lose your home. The way to protect your home in a Chapter 7 bankruptcy is to keep current on your mortgage and have a low amount of equity in your home.
  
  

State Exemptions

• Even though bankruptcy is a federal process, states are granted the power to determine their own exemption levels for bankruptcy purposes. Depending on which state you live in, you may have a generous or stingy exemption for home equity. For example, if you are a single homeowner filing bankruptcy in Tennessee, you can only keep a home with equity up to $5,000. If you instead reside in Florida, you have an unlimited homestead exemption. To protect your home in Chapter 7 bankruptcy, your net equity in the home must fall below your state's homestead exemption level.
  
  

Auction or Buyback

• Even if you are current on your mortgage payment and can avoid foreclosure, the bankruptcy trustee will most likely sell your house at auction if its value is above your state's exemption level. In certain situations, you may be able to offer your trustee a cash payment equal to the amount of equity you have in your home. However, if you qualify for Chapter 7 bankruptcy you probably do not have the ability to make such a payment.
  
  

Chapter 13 as an Option

• If you are intent on keeping your home but cannot protect it in a Chapter 7 bankruptcy, you may consider filing a Chapter 13 instead. A Chapter 13 requires that you make payments according to a court-sanctioned payment plan for up to five years. However, in exchange for your payments all of your assets are protected and you may keep your house.