For many people considering bankruptcy, the single biggest concern is their home. Nearly every client we work with asks “Is the equity in my house protected if I file bankruptcy?” This is an entirely reasonable question, and the fear of losing your home often stems from misinformation and myth. Your home is likely your largest asset, and protecting it is a top priority for most families. The good news is that bankruptcy laws are specifically designed to protect homes and the equity built into them, especially here in Texas.
Understanding how home equity works in bankruptcy, and how the rules differ between Chapter 7 and Chapter 13 cases, can provide peace of mind and help you make informed decisions about your financial future.
Don’t believe the myths and misninformation
One reason so many people fear for their home in bankruptcy is because misinformation is often repeated by debt collectors or debt management companies. These organizations make money by keeping consumers in repayment programs or collections, and they have a strong incentive to discourage conversations with bankruptcy attorneys. Telling someone that bankruptcy will automatically cost them their house is an effective fear tactic, but it is usually inaccurate, especially under Texas law. Bankruptcy attorneys are legally required to explain exemptions, protections, and risks honestly, while debt collectors and debt settlement companies are not held to the same standard. Speaking directly with an experienced bankruptcy attorney is the best way to separate fact from fiction and understand how bankruptcy laws are actually designed to protect homeowners, not take their homes away.
How bankruptcy law protects your home
Bankruptcy law allows individuals to keep certain property through what are known as exemptions. Exemptions protect assets from being taken by creditors or, in some cases, from being sold by a bankruptcy trustee. One of the most powerful and generous exemptions available is the Texas homestead exemption.
Texas has one of the strongest homestead protections in the country. Under Texas law, your primary residence is protected regardless of the amount of equity you have in it. There is no dollar cap on home equity for a qualifying homestead. Whether you have twenty thousand dollars in equity or several hundred thousand dollars, the exemption can protect your home as long as it meets the legal definition of a homestead.
The property must be your primary residence, and there are acreage limits depending on whether the property is located in an urban or rural area. For most homeowners in the Dallas–Fort Worth area, these limits are rarely an issue.
Because of this exemption, many Texans are surprised to learn that bankruptcy often makes it easier, not harder, to keep their homes.
What is home equity and why does it matter?
Home equity is the difference between the value of your home and the amount you still owe on your mortgage. For example, if your home is worth $400,000 and you owe $250,000 on the mortgage, you have $150,000 in equity.
In bankruptcy, equity matters because unprotected equity can sometimes be used to repay creditors. In Texas, the homestead exemption typically prevents this from happening for your primary residence.
However, how equity is treated still depends on the type of bankruptcy you file.
How Chapter 7 bankruptcy affects home equity
Chapter 7 bankruptcy is often called a liquidation bankruptcy. In theory, a trustee can sell non-exempt property and use the proceeds to pay creditors. In practice, most Chapter 7 cases are “no asset” cases, meaning there is nothing for the trustee to sell.
For Texas homeowners, the homestead exemption is usually the key reason. If your home qualifies as a homestead, the equity is protected. This means the Chapter 7 trustee cannot force the sale of your house simply because you have equity in it.
However, it is important to understand that Chapter 7 does not eliminate mortgage obligations. If you are behind on mortgage payments, Chapter 7 does not provide a mechanism to catch up over time. You must continue making your regular mortgage payments if you want to keep the home. If you are significantly behind, Chapter 13 may be the better option.
Chapter 7 works best for homeowners who are current on their mortgage or only slightly behind and who want to eliminate unsecured debts like credit cards, medical bills, and personal loans.
How Chapter 13 bankruptcy protects home equity
Chapter 13 bankruptcy works very differently. Instead of liquidation, it is a reorganization. You keep all of your property and repay some or all of your debts through a court-approved payment plan lasting three to five years.
Home equity plays a larger role in Chapter 13, but it is still well protected. The value of your non-exempt property helps determine how much you must pay unsecured creditors over the life of the plan. Because Texas provides such strong homestead protection, most homeowners do not have to pay extra simply because of home equity.
One major advantage of Chapter 13 is its ability to stop foreclosure and allow you to catch up on missed mortgage payments over time. If you are behind on your mortgage, Chapter 13 can spread those arrears out into manageable monthly payments while you remain in your home.
Chapter 13 is often the best solution for homeowners who have fallen behind due to job loss, medical issues, or other temporary financial hardships.
Why expert bankruptcy advice matters
While Texas law strongly protects home equity, every case is different. Factors such as multiple properties, recent property transfers, tax liens, or home equity loans can affect how your home is treated in bankruptcy. That is why it is critical to speak with an experienced bankruptcy attorney who understands both federal bankruptcy law and Texas property exemptions.
A properly planned bankruptcy case can eliminate overwhelming debt while protecting what matters most to you.
Speak with a Dallas bankruptcy attorney today
If you are worried about protecting your home (or your home equity) during bankruptcy, do not rely on assumptions or misinformation. A qualified bankruptcy attorney will review your situation, explain your options, and help you choose the right path forward. If you have questions about Chapter 7, Chapter 13, or how Texas law protects your home, contact Rubin & Associates today to schedule a consultation and get clear, reliable answers.