How to File Bankruptcy When You Have Too Much Home Equity

How to File Bankruptcy When You Have Too Much Home Equity

Most debtors considering bankruptcy have very little or no home equity.  If you’re filing Chapter 7 bankruptcy and you have very little or no equity in your home, you’ll most likely be allowed to keep your home as long as you’re making mortgage payments. However, in a small number of bankruptcy cases debtors may have too much equity.


Most states allow Chapter 7 bankruptcy debtors to keep their home equity up to a certain amount. This amount is determined by bankruptcy exemptions.  There are both state and federal bankruptcy exemptions, and some states will allow you to choose which exemption you want to use.  However, state exemption amounts can vary widely. For example, South Carolina has a bankruptcy exemption for real estate of $58,225 while New York’s exemption is up to $165,550 for some counties. If you’re living in a state that doesn’t offer a generous bankruptcy exemption for real estate, this may mean that you have too much equity.

Excessive Equity

If the bankruptcy exemption for real estate in your state is too little to cover all of your equity, your excess equity may be vulnerable to creditors. The bankruptcy trustee will seek to liquidate your real estate and distribute the excess equity to creditors. However, there are some instances when the trustee won’t bother to liquidate a property even if it has some excess equity.  Before determining if liquidation is worth the time and expense, the bankruptcy trustee will calculate the cost of liquidation and compare it to how much equity can be extracted. If the expense of liquidation leaves too little equity, the trustee won’t seize the property.

Filing Without Your Spouse

If you file bankruptcy without your spouse and you have too much equity in your home, how that property is handled will depend on in which state you reside. If you live in a common law property state the bankruptcy trustee can generally only go after your interest in the property—not your spouse’s. But if you live in a community property state, the trustee can go after all of the equity in the property since both you and your spouse equally own the home.

If you want to learn more about protecting your home equity during bankruptcy, talk to your bankruptcy attorney.