Filing for bankruptcy is one of the most difficult decisions a homeowner can make. But for many New Yorkers facing overwhelming debt, foreclosure, or financial hardship, bankruptcy can be a powerful tool to protect your home and reset your financial future.
This guide explains how bankruptcy works in New York as it relates to your home — which chapter to consider, how the homestead exemption protects your equity, whether you can sell during bankruptcy, and what happens to your mortgage. Understanding these details can help you make an informed decision about whether bankruptcy is the right path for your situation.
Chapter 7 vs. Chapter 13: Which Protects Your Home?
The two most common types of consumer bankruptcy are Chapter 7 (liquidation) and Chapter 13 (reorganization), and they treat your home very differently.
Chapter 7 eliminates most unsecured debts but requires you to surrender non-exempt assets. If your home equity exceeds New York's homestead exemption, the trustee can sell your home to pay creditors. If your equity is within the exemption, you can keep your home — but you must stay current on your mortgage payments.
Chapter 13 allows you to keep all your property while repaying debts over a three-to-five-year plan. It is particularly powerful for homeowners because it lets you cure mortgage arrears over the plan period while making current payments going forward. This is often the best option for homeowners who have fallen behind on their mortgage but have stable income.
New York's Homestead Exemption
New York's homestead exemption protects a certain amount of equity in your primary residence from creditors in bankruptcy. The exemption amount varies by county. In Dutchess, Putnam, and Orange counties (Hudson Valley), the homestead exemption is $179,950 per person as of 2026 under CPLR §5206 and Debtor and Creditor Law §282.
For married couples filing jointly, the exemption can effectively double. This means if you and your spouse have $300,000 in equity, the full amount may be protected in a Chapter 7 filing. However, if your equity exceeds the exemption, the trustee can sell your home, pay you the exemption amount, and distribute the remainder to creditors.
Understanding your exact equity position is critical before filing. A current market analysis of your home — which the Hudson River Realtors network can help you obtain confidentially — combined with your mortgage balance and any other liens will determine whether your equity is fully protected.
The Automatic Stay: Immediate Foreclosure Protection
One of the most powerful features of bankruptcy is the automatic stay. The moment you file a bankruptcy petition, an automatic stay goes into effect under 11 U.S.C. §362. This immediately stops virtually all collection actions against you, including foreclosure proceedings.
For homeowners facing an imminent foreclosure auction, the automatic stay can provide critical breathing room. However, the stay is temporary — the lender can file a motion for relief from stay, and if the court grants it, the foreclosure can resume. In Chapter 13, the stay remains in effect as long as you are making plan payments and staying current on your mortgage.
Selling Your Home During Bankruptcy
Yes, you can sell your home during bankruptcy — but you need court approval. In Chapter 7, the bankruptcy trustee controls the sale of non-exempt assets. If you want to sell your home, you will need to work with the trustee and obtain court approval for the sale terms. In Chapter 13, you file a motion with the court to sell, and the sale proceeds are distributed according to your repayment plan.
Selling during bankruptcy adds complexity but is often the best financial decision. The sale can pay off your mortgage, satisfy liens, fund your Chapter 13 plan, and provide a fresh start. Working with a real estate professional experienced in bankruptcy sales is essential — the Hudson River Realtors network can connect you with the right agent.
What Happens to Your Mortgage in Bankruptcy
Your mortgage is a secured debt, which means it is treated differently from credit card bills and medical debt. In Chapter 7, you must either reaffirm the mortgage (agree to keep paying it) or surrender the property. If you reaffirm, you keep the home and the obligation to pay. If you surrender, the debt is discharged but you lose the property.
In Chapter 13, you continue making regular mortgage payments while curing any arrears through your repayment plan. At the end of the plan, your mortgage is current and you keep your home. If you have a second mortgage or HELOC that is wholly unsecured (the balance of the first mortgage exceeds the home's value), you may be able to strip the junior lien entirely in Chapter 13.
Lien Stripping in Chapter 13
Lien stripping is a powerful tool available in Chapter 13 bankruptcy. If your home is worth less than what you owe on your first mortgage, any junior liens (second mortgages, HELOCs, judgment liens) are considered wholly unsecured and can be stripped — meaning they are treated as unsecured debt and potentially discharged at the end of your plan.
For example, if your home is worth $350,000 and you owe $360,000 on your first mortgage plus $50,000 on a HELOC, the HELOC is wholly unsecured. In Chapter 13, you can strip that HELOC and treat the $50,000 as unsecured debt, paying only a percentage through your plan. This can save homeowners tens of thousands of dollars.
Credit Impact and Recovery
Bankruptcy has a significant impact on your credit. Chapter 7 remains on your credit report for 10 years, Chapter 13 for 7 years. Your credit score may drop by 100 to 200 points initially.
However, many people find that their credit begins recovering faster than expected after bankruptcy because the discharge eliminates the ongoing negative impact of unpaid debts, late payments, and collections. Many former bankruptcy filers qualify for an FHA mortgage within two years of a Chapter 13 discharge or three years after a Chapter 7 discharge.
When Bankruptcy Is and Isn't the Right Choice
Bankruptcy is not the right solution for everyone. It is most effective when you have significant unsecured debt that you cannot realistically repay, when foreclosure is imminent and you need the automatic stay, or when you need to cure mortgage arrears over time through Chapter 13.
Bankruptcy may not be the best choice if your primary problem is a single lien that can be negotiated, if you have assets that exceed exemption limits and want to keep them, or if your income is too high to qualify for Chapter 7 and too unstable for a Chapter 13 plan.
Consulting with a bankruptcy attorney is essential before filing. The Hudson River Realtors network can also help you understand your real estate options — sometimes a strategic sale can solve the problem without bankruptcy.
Considering bankruptcy and wondering about your home? Contact Hudson River Realtors for a free, confidential real estate consultation. We can help you understand your equity position and connect you with the right professionals. Call (845) 867-2450 or start your intake today.