Can I Keep My House if I File Chapter 7?

NC homestead exemption

Can I protect my family’s home?

One of the most common questions I get from clients is whether they will be able to keep their house if they file chapter 7 bankruptcy. Luckily, this is a pretty straightforward matter.

First of all, in order to keep your house you must remain current on your monthly mortgage payments. And, by “mortgage” I am referring to the primary mortgage, plus any home equity lines of credit, or any other liens on your property. You must also pay your annual property tax bills. Many people have their tax bills paid through their mortgage in an escrow arrangement. If so, this is fine. If not, make sure that you budget so that you can pay the tax bill at the end of the year. If you don’t pay your mortgage and/or property taxes, then your home will be foreclosed on.

Secondly, you must not have too much equity in your home. NC does NOT have an unlimited homestead exemption. In NC bankruptcy a debtor is allowed to exempt (ie, “protect”) up to $35,000 worth of equity in her home by claiming the NC homestead exemption. Equity is simply the value of the home over and above the amount of the liens encumbering the home. A married couple filing jointly may exempt up to $70,000 of equity (ie, $35,000 each.) There are 3 exceptions to this rule, which I will discuss below.

 Before discussing the exceptions, I want to address how the NC exemption law plays out in real life. If a debtor file ch7 bankruptcy and owns a home valued at $150,000 with a mortgage lien of $125,000, then she has $25,000 in equity. This $25,000 is less than the $35,000 homestead exemption and so it is exempt. On the other hand, if a debtor owns a home worth $150,000 with a mortgage of $60,000, then she has $90,000 worth of equity. This is more than she can exempt. Thus, if she files ch7 the Trustee will sell the home, pay the mortgage lien, pay her $35,000 (her homestead exemption amount), and keep the balance to distribute to her creditors. As you can see, properly valuing your home by obtaining an appraisal or a market analysis by a licensed realtor can be crucial.

There are 3 exceptions to the $35,000 NC homestead exemption rule:

  1. Older widowers. An unmarried person who is 65 years of age or older and who owned his or her home with a deceased spouse may claim up to $70,000 as exempt in his or her homestead.
  2. Tenancy by the entireties. A married couple who owns their real estate as tenants by the entireties (a special form of real property ownership in NC that is limited to married couples) and who have no joint unsecured debt may protect all of the equity in their real estate, including their home, no matter how much equity they have. However, if they have joint debts then they cannot use this exemption.
  3. A recent move to NC from a state with a more favorable homestead exemption. If you file bankruptcy in NC but have not lived in NC for 2 years then you may have to use the exemptions from the state from which you moved. (Deciding which exemptions to use when you have not lived in NC for 2 years will be another blog topic entirely.) If you must use another state’s exemptions AND that state has a more favorable homestead exemption, then you can protect whatever amount of equity that state allows.

At Kight Law Office, we advise people every day about their homes. We realize that your home is often the single most important piece of your financial and personal life. Contact us to discuss protecting your home.