You can frequently keep your paid-in-full house in bankruptcy. However, you may be forced to file a Chapter 13 repayment plan instead of Chapter 7 in some states. In other states, you may have a high enough residence “exemption” to simply file for Chapter 7. This residence “exemption” in bankruptcy protects your house and allows you to keep it.
Chapter 7 bankruptcy clears out all of your debts at one time without a payment plan. However, to file Chapter 7 with a paid-in-full house, you will likely need to be in a state that has a very high residence exemption. This “exemption” protects your house.
States like Florida and Texas have extremely high or unlimited residence exemptions. You can usually file Chapter 7 in these states and protect your paid-off house. Other states have lower, workable amounts such as Massachusetts that can range from $125,000 to $500,000 in house protection. You will need to check with your bankruptcy attorney to make sure your state’s bankruptcy exemption is going to protect your full house value.
Indiana only has a residence exemption of $19,300 per person. This can double to $38,600 in a joint case. There is also one other exemption that can protect married couples with paid-in-full houses in certain cases where the spouses do not share debts. Because of the lower Indiana exemptions, it is important to be careful in Indiana with paid-in-full houses. You will need to seek advice from a bankruptcy attorney, especially if you live in Indiana and own a paid-in-full house.
Chapter 13 always allows you to keep your paid-in-full house in bankruptcy. If your house does not have a mortgage, you can pay off your debt through the Chapter 13 repayment program instead. You always keep your house. Every dollar you pay into the Chapter 13 that goes to regular-style debts adds an extra dollar of protection for your house.
The only downside to Chapter 13 with a paid-in-full house is that sometimes the repayment amount can get expensive. You will be required to “cover” all the non-protected equity in your house when you file Chapter 13. For instance, a high-value paid-off house can make your Chapter 13 case very expensive each month. This is especially true when you also have a very high amount of debt when you come into the Chapter 13 case.