What happens to your home when you file bankruptcy depends on how much equity you have in the home and which chapter of bankruptcy you file.

In a chapter 7 bankruptcy, your home is at risk of being liquidated if the equity in the home exceeds the applicable state’s exemption amount. The homestead exemption in Colorado is $75,000 or $105,000 for the elderly and disabled. The trustee will take into account the costs of sale, therefore, if your home is slightly over the exemption limit you might be safe. However, if you are close to or over the exemption limit, you should consider filing a chapter 13 which is not a liquidation. Unlike a chapter 7 bankruptcy which you cannot easily get out of once it is filed, you can always dismiss a chapter 13. A chapter 7 is not a revolving door. You are not guaranteed a free-look in a chapter 7. If you file a chapter 7 and later seek to dismiss the case because the trustee decided there is enough equity to liquidate, there is no guarantee that you can dismiss or convert the case.

If you file a chapter 13 bankruptcy and your home’s equity exceeds the exemption limit, you will not lose the home. However, the equity may impact the amount you are required to pay to unsecured creditors. There is a rule in chapter 13 bankruptcy known as the chapter 7 reconciliation. This rule requires a debtor to pay unsecured creditors as much as they would receive in a hypothetical chapter 7 liquidation.

An attorney will estimate what creditors would receive in a chapter 7 using a formula which subtracts the mortgage principle, the $75,000 exemption, closing costs, and estimated chapter 7 administrative expenses. In many cases, the net proceeds are minimal and do not impact the chapter 13 payment amount. In other cases, the debtor has so much equity that the net proceeds would be more than adequate to pay their debts off in full.