Chapter 7 vs. Chapter 13: What If I Have a House with Equity but Low Income?

Introduction

Homeownership is often the biggest concern when considering bankruptcy. If you have a house with equity but limited income, the decision between Chapter 7 and Chapter 13 bankruptcy becomes especially important. Each chapter treats home equity differently, and your choice could determine whether you keep or lose your house.

How Chapter 7 Handles Home Equity

• Exemptions Apply: You can keep your home only if your equity (value minus mortgage) fits within your state’s homestead exemption.

• Non-Exempt Equity Risk: If equity exceeds the exemption, the Chapter 7 trustee may sell the property, pay off the mortgage, give you the exempt portion, and distribute the rest to creditors.

• Low Income Factor: Chapter 7 may be available because of your income, but home equity puts your property at risk.

How Chapter 13 Handles Home Equity

• Protects Your Home: Instead of selling, Chapter 13 lets you keep your property, even if equity exceeds exemptions.

• Repayment Plan: You pay creditors through a 3–5 year plan. If you have non-exempt equity, your plan payments must at least equal the amount creditors would have received in Chapter 7.

• Cure Mortgage Arrears: Chapter 13 also allows you to catch up on missed mortgage payments over time.

Key Comparison

Factor	Chapter 7	Chapter 13
Home Equity	Safe only if fully exempt	Protected even if above exemptions
Income	Must qualify under means test	Requires enough income for plan payments
Mortgage Arrears	No ability to cure arrears	Can spread arrears over 3–5 years
Risk	Trustee may sell home	Higher payments, but you keep your house

Example

• Home Value: $250,000

• Mortgage Balance: $150,000

• Equity: $100,000

• State Homestead Exemption: $25,000

• In Chapter 7, the trustee could sell the house because $75,000 of equity is non-exempt.

• In Chapter 13, you can keep the home by committing to a repayment plan that accounts for the non-exempt equity.

Conclusion

If you own a home with significant equity but have low income, Chapter 13 is usually the safer option to protect your property. Chapter 7 may seem faster and easier, but it risks losing your home if exemptions don’t cover your equity. A bankruptcy attorney can calculate exactly how exemptions and repayment plans would apply to your situation.